Throughout 2023, the global economy encountered persistent challenges as economies sought to rebound from the effects of the pandemic. Efforts to reinvigorate growth were severely hampered due to the significant tightening of monetary policy across the globe, as many regions and governments attempted to manage and mitigate the effects of high inflation.
The ongoing conflict in Ukraine and rising tensions in the Middle East also created challenges for global leaders. As a result, it is expected that global growth will continue to slow with many of the same challenges persisting well into 2024.
With many advanced economies across the globe showing some levels of stress within their domestic financial markets, the outlook for 2024 remains cautious with fears that persistent inflation, coupled with rising geopolitical tensions in many regions, could result in a further erosion of global economic growth prospects. There is real concern that many emerging economies will become more vulnerable to the impact of higher borrowing costs and the ongoing burden of managing debt.
A key focus of leading nations during the recent COP28, held in Dubai, was a renewed emphasis on the importance to maintain and increase international cooperation on challenges such as climate change, supporting nations most affected by crises and hunger, and also assisting with debt management to countries in need.
According to the World Bank – Global Economic Prospects Report (June 2023), global growth was forecasted to slow sharply from 3.1 per cent in 2022 to 2.1 per cent in 2023, which represents a 1.0 per cent contraction. Global growth in 2024 is forecasted to edge up slightly to a subdued level of 2.4 per cent.
Furthermore, the World Bank reports that Emerging Market and Developing Economies (EMDEs) are forecasted to decline from 4.1 per cent in 2022 to 2.9 per cent in 2023. This represents a 1.2 per cent contraction with overall growth for the period 2020-2024 expected to average at 3.4 per cent.
As reported by the World Bank, there are five key areas identified to assist global leaders and policymakers to manage and mitigate the most pertinent challenges. This includes, mitigating financial contagion, reducing domestic vulnerabilities, restoring financial sustainability, reinvigorating long-term growth and alleviating debt distress and strengthening the global financial safety net.
Source: World Bank Economic Prospects, June 2023
Global inflation
Following the acceleration of global inflation during 2022, it is noted that up to June 2023 inflation remained above the targeted levels within most advanced economies whereby targets are set. According to the World Bank – Global Economic Prospects Report (June 2023), median headline global inflation was 7.2 per cent (y/y) up to April 2023. This was a notable reduction from a level 9.4 per cent (y/y) in July 2022 and was due to reductions in commodity prices, easing of supply chain pressures and moderating energy prices. These trends had been maintained in many economies throughout 2023 until recent developments in the Middle East.
Purchasing Managers Index (PMI)
The global composite Purchasing Managers Index (PMI) for 2023 rose from below the 50-point mark in January 2023 (49.7) and stood at 54.4 in May 2023, before gradually falling to 50.7 in November 2023.
Source: IHS Markit/JP Morgan
Commodity Prices
With rising geopolitical tensions in the Middle East, it is inevitable that such uncertainty impacts global commodity markets, which had up until recent times been mitigating against other global issues such as the ongoing conflict in Ukraine.
According to the World Bank – Commodity Markets Outlook Report (October 2023), prior to the recent conflict in the region, oil supply cutbacks by OPEC+ producers resulted in energy prices increasing by 9 per cent during Q3 of 2023. This resulted in the World Bank’s commodity price index rising by 5 per cent over that period.
Notably, the same report outlines that prices are now 45 per cent above average during the period 2015-19. The main risk for commodity markets arises from the potential of the conflict escalating, leading to a dramatic increase in commodity prices across the globe.
According to the same report by the World Bank, it is expected that commodity prices will continue to fall in 2024 due to weak global growth, resulting from tighter financial conditions seen across many of the global economies.
The below graphs illustrate how commodity prices, and energy in particular, increased between 2020 and 2022. Having fallen back in 2023, they are forecasted by the World Economic Outlook Database (October 2023) to remain consistent out to 2026, however any escalation of current conflicts or further global setbacks would remain a risk.
Source: IMF, World Economic Outlook Database, October 2023
Source: World Bank Economic Prospects, June 2023
Energy
According to the World Bank – Global Economic Prospects Report (June 2023) and the World Bank – Commodity Markets Outlook Report (October 2023), energy prices eased since a peak in the third quarter of 2022, largely because of a warmer start to winter in the northern hemisphere. It is also reported that prices could fall lower, dependent on whether global demand is weaker than expected.
Given that demand from the Chinese economy is expected to account for more than 50 per cent of global oil demand, the outcome will be heavily influenced by the performance of the Chinese economy during 2023 and beyond. The same report by the World Bank also identifies the risk associated with a lack of expansion in U.S. oil production, in addition to low levels of spare capacity among OPEC members.
With recent developments in the Middle East in mind, such conflicts have always created volatility within energy markets consequently. Oil prices have risen 6 per cent due to ongoing concerns about the continuity of supply from the region and the impact it will have on global supply. Gas markets in the region have also been affected with prices rising by an additional 35 per cent when a gas field off the Israeli coast was closed.
Looking at European markets in more detail it is reported that the price of natural gas has risen since September, albeit due to the industrial action at Australian LNG facilities. Other notable events that have impacted gas markets relate to an explosion at a facility located in the Baltic Sea.
Source: IMF Primary Commodity Prices
Oil
As documented in the recent World Bank – Commodity Markets Outlook Report (October 2023), it is estimated that oil demand across the globe reached 103 million barrels per day (mb/d) during Q3 2023 – which would represent a record high.
Looking at oil supply, the same report outlines that estimated production in Saudi Arabia during Q3 2023 was predicted to be the lowest in more than the preceding 10-year period outside of recessions. However, it is noted within the report that reductions to production by OPEC+ have been offset by increases in in the Americas, led by the United States.
The report outlines that prices have been volatile during 2023 due to global growth prospects and ongoing geopolitical concerns in many regions.
The below graph, based on data from OPEC, illustrates how oil prices in 2023 started just above $81/bbl in January, reaching $84.13/bbl in April and up to $94.6/bbl in September before dropping back in October 2023.
Source : OPEC
source: OPEC 2023 World Oil Outlook 2045
Natural Gas & Coal
As reported by the World Bank – Commodity Market Outlook Report (October 2023), the price of both natural gas and coal was expected to moderate in 2023. A key reason for this is improved efficiency and energy demand reduction seen in key markets.
Due to the ongoing conflict in Ukraine, the European Union has opened new supply lines of liquefied natural gas (LNG) imports from Norway and North Africa. At the same time, demand from within the European Union for natural gas has fallen because of efficiency gains, policies changes and weaker economic growth, leading to a fall in production outputs within the industrial sector. On a global scale, it is envisaged that a reduced demand from China is also impacting gas markets.
From a further review of the World Bank – Commodity Market Outlook Report (October 2023), it was estimated that natural gas inventories within the European Union had reached 95 per cent of full capacity ahead of winter, which itself has started mildly and as a result, reducing demand.
Notwithstanding the above, natural gas prices across the European Union remain 82 per cent above their 2015-19 average, according to the World Bank – Commodity Market Outlook Report (October 2023). With the global energy transition gaining momentum, the same report notes that coal prices continued to decline.
Metals
From a review of the World Bank – Commodity Market Outlook Report (October 2023), metal prices experienced an increase during the early period of 2023. The same report also outlined that metal prices are expected to decline in 2023. It is noted that declining prices during 2023 reflect a correction in supply lines which were affected during the pandemic, as well as lower than expected global growth across many of the leading economies.
Like the oil and gas markets, the Chinese economy will also impact the metals market. As identified in the World Bank’s before-mentioned report, China accounts for a significant portion of the overall demand across the globe, therefore any fluctuation results in a substantial change in the overall market.
The graph below shows that aluminium prices are expected to fall in 2023, with prices of iron ore and copper expected to rise, although the increase in copper prices being marginal.
Source: IMF, World Economic Outlook Database, October 2023
Global economic risks
Source: Economic Policy Uncertainty
Key economic risks 2023
The following are major risks identified for 2022 and beyond.
Throughout 2023, inflation has remained high and economies across the globe have seen a slump in projected growth levels following post pandemic improvements. Many believe that inflation will remain at elevated levels for several years, resulting in lower growth projections, but with the prospect of a deep recession becoming a real issue for many economies.
Geopolitical conflicts continue to be a significant risk to global economies with ongoing conflicts threatening the stability of markets on a level not witnessed since World War II. There also remains a risk to global stability if conflicts were to escalate beyond the region.
Trade tension between the US and China continues to pose a risk and competition is expected to rise within the technology sector with restrictions placed on tech exports to and from China, leading to exposed supply chains.
New technologies are set to reshape economies with a drive towards artificial intelligence, autonomous vehicles and the use of drones; the digital world will be vulnerable to cyberattacks. This is already seen with critical infrastructure (energy, healthcare and transportation) and geopolitical and economic uncertainties due to a lack of suitable governance.
Extreme weather caused by climate change will require governments to make renewed and increased commitments in reducing their countries emissions, as well as assisting those countries most affected by adverse weather but without the financial means to combat the risk and respond to events. Continued focus will be placed on the oil, gas, airline and automotive industries, in addition to the food industry, as this will remain a prevailing risk in 2024 and beyond.
Biodiversity loss is caused by climate change, pollution, deforestation and habitat loss. This risk threatens global ecosystems, affects livelihoods, food supplies and income and may lead to disease outbreaks.
Natural disasters can be a preventable risk, and solutions such as reforestation, education, technology governance and economic support could help mitigate and reduce the risks caused by global warming, pollution and mining.