S&P Global Ratings’ team of economists, led by Chief Economist Dr. Paul Gruenwald, is responsible for developing the macroeconomic forecasts and risk scenarios used by S&P Global Ratings' analysts during the ratings process, as well as leading key cross-sector and cross-divisional research projects.
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ON THIS PAGE Global U.S. Eurozone Asia-Pacific Emerging Markets Canada EMEA Emerging Markets Latin America
The highly anticipated global recession has yet to arrive. The consensus view is that a sharp slowdown is all but inevitable, given the steepest rise in policy rates in four decades, ongoing geopolitical tensions, and energy supply constraints stemming from the Russia-Ukraine conflict. In line with this view, sentiment indicators such as purchasing managers' indices have been signaling a sharp slowdown for months. And an array of consumer and business confidence indicators have given similar signals.
However, activity data are not cooperating and third quarter GDP featured a swathe of upside surprises. The U.S. economy grew by 2.6% on an annualized basis as slowing but still positive consumption growth, especially in services, and exports offset weakness in the interest rate sensitive real estate sector. The Eurozone economy surprised by growing at all, with output expanding by 0.8% annualized in the flash estimate, with all major economies, including Germany, recording higher output. China surprised on the upside as well, growing 3.9% on a year-on-year basis, boosted by net exports and government spending. The property sector has remained weak due to restrictive housing sector policy and ongoing COVID-19 restrictions.
Asia-Pacific will be a bright spot in the global economy in 2023. S&P Global Ratings assumes that domestic resilience and solid growth in mainland China--albeit off a weak base--will keep regional growth at a healthy level. Strong consumption in the more domestically led economies of India, Indonesia, and the Philippines will also lift the average. Beneath this overall resilience are significant pockets of weakness. Soft global demand will deplete growth in export-driven economies, such as South Korea and Taiwan. GDP levels in Asia-Pacific ex-China will decelerate in 2023 to 3.9%, from 4.8% in 2022, by our estimate.
Asia-Pacific will be vulnerable to foreign exchange (forex) stress in 2023. High U.S. interest rates and significant current account deficits in some countries create vulnerability. Policymakers have managed currency strains so far. But the possibility of a currency crunch and capital flight may yet rattle one or more emerging markets in 2023.
Winter chills are likely to weigh on Canadian economic activity into the new year. After the economy's relatively solid gains for the third quarter of 2022, S&P Global Economics sees a dramatic slowdown in Canada's economic momentum in the fourth. It will likely expand by an annualized 0.2% in real terms in the fourth quarter, less than a quarter of the 1.1% pace expected for the third quarter.
Growth has likely been hurt by a slowdown in household spending and residential investment as demand weakens on high prices and interest rates. Canadian exports held up surprisingly well in the third quarter and are likely to remain healthy in the fourth. But because we expect the U.S. economy to dip into a mild recession next year, trade with Canada's southern neighbor is expected to slow, keeping a cap on overall trade in 2023.
The global macro environment may not have deteriorated since late-September, but it hasn't improved, either. Conditions continue to reflect elevated geopolitical tensions and economic policy uncertainty.
The Russia-Ukraine conflict (and the proxy economic war with the West) continues with no end in sight. Governments face a tricky trade-off between public debt management and macroeconomic stability. Major central banks (excluding Japan and China) remain steadfast in pursuing hawkish monetary policy to address above-target inflation. China is still committed to its zero COVID-19 policy. There are murmurs China will soften its lock-down stance and the U.S. its monetary policy stance (following lower-than-expected October inflation), but nothing meaningful yet to bank on.
As the year draws to a close, the fallout from the Russia-Ukraine military conflict continues to shape the macroeconomic outlook and risks for emerging markets in Europe, the Middle East, and Africa (EM EMEA). The impact will depend on each country's geographic and economic proximity to the conflict, as well as on the extent and variety of exposure to commodity trade. Tightening of global financial conditions will act as a headwind for the whole region.
Economies in Central and Eastern Europe (CEE) that are most exposed to the conflict's economic spillovers will continue to face elevated energy import bills, risk of energy supply disruption, and high uncertainty that weighs on consumer and business confidence. A downturn in developed Europe, CEE's key economic partner, further clouds the region's economic prospects. For energy-exporting economies in the Gulf Cooperation Council, the macroeconomic picture is generally very positive. Saudi Arabia, a key global exporter of oil, is on track to become the fastest growing economy in the G-20 this year.
The European economy's strong momentum will almost come to a halt early next year. Sticky inflation, stunted hiring, and higher interest rates will be clear negatives. But a substantial acceleration in wages and stronger public investment should support domestic demand and steer the economy toward a modest recovery from the middle of next year.
As 2022 comes to a close, manufacturing production in the EU is at an all-time high, even if energy-intensive sectors have curtailed activity because of higher costs. The hiring cycle is still strong and driving consumption. On the other hand, the policy rate cycle is probably closer to the end than the beginning, but also isn't over yet. We expect the ECB to hike rates by another 75 basis points before pausing. What's more, its balance sheet could shrink by almost €3 trillion in three years.
S&P Global Ratings' macroeconomic assumptions for Latin America remain broadly unchanged since our previous update in September. Stronger-than-expected growth in the third quarter pushed up our 2022 GDP growth estimate for Latin America to 3.4%, from 2.8% previously, but we still expect the major economies in the region to enter a period of below-trend growth in 2023. We forecast growth to slow to 0.7% in 2023, compared to 0.9% in our previous projection.
The combination of the effects of tight global financial conditions, weak demand in key trading partners (especially the U.S. and China), and a deterioration in domestic demand as the still ongoing recovery from the pandemic-related downturn loses momentum will mainly drive the slower GDP growth next year. We then expect growth in the region to return to its traditionally low rate of just above 2% in 2024.
Continued high prices through most of next year and the Fed's decision to aggressively raise rates--accepting, in our opinion, the collateral damage to the U.S. economy--are leading households to pull back on spending and businesses to cut costs in response to slowing demand.
With odds that the U.S. economy will avoid recession over the next 12 months dimmed, we continue to expect the U.S. will fall into recession in 2023. We now expect GDP growth to weaken to -0.1% in 2023. Peak-to-trough U.S. GDP will decline by 0.8%, a mild recession in line with the 1969/1970 recession.
