The year that was

Vale 2023

The defining aspect of 2023 has been the resilience of the global economy, led by the developed countries of the west. How unexpected the performance of these economies has been, is set in sharp relief when we look at expectations of professional forecasters at the start of the year compared to the likely outcome now that the year is almost completed.

According to the panel of professional forecasters reported by Consensus Economics (CE), at the start of the year, the average annual growth expectations for GDP in 2023 for the US, euro area, UK and Canada were 0.3%, 0.0%, -1.0% and 0.4%, respectively. The likely outcomes for GDP growth in these economies, again according to the professional forecasters reported by CE in their December release, is 2.4%, 0.5%, 0.5% and 1.1%, respectively for the US, euro area, UK and Canada. These forecast underestimates of 2.1 percentage points (ppts) in the US, 0.5ppts in the euro area, 1.5ppts in the UK and 0.7ppts in Canada are unusually large in a year that included a banking crisis and an outbreak of a major and unexpected military conflict. So, why the miss?

There is one clear factor explaining the better-than-expected performances of these economies: consumer spending. At the start of the year, expectations for the average annual growth of consumer spending were: 0.8% in the US, 0.2% in the euro area, -1.1% in the UK and 1.0% in Canada. In each jurisdiction, the actual outcome is likely to be much higher. December CE predicts consumer spending will have grown over 2023 by 2.2% in the US, 0.5% in the euro area, 0.5% in the UK and 2.0% in Canada, mirroring the differences in expectations and likely outcomes seen across these countries in GDP growth.

The GDP performance of developed economies in our region was mixed. Growth outturns are likely to exceed expectations for Australia (1.6% expected cf 1.8% currently), Japan (1.2% cf 1.7%), Hong Kong (2.8% cf 3.4%) and South Korea (1.2% cf 1.3%), while New Zealand’s outlook has remained static at 1.4% and Singapore’s and Taiwan’s outlooks have deteriorated from 1.7% and 2.1%, respectively, at the start of the year to just 0.9% and 1.1% currently. A similar mixed story is evident across the regions developing economies. China (4.6% cf 5.2%), Indonesia (4.5% cf 5.0%), and the Philippines (5.1% cf 5.2%) have exceeded expectations, while India (6.9% cf 6.6%), Thailand (3.7% cf 2.5%) and Vietnam (5.8% cf 4.6%) have underperformed expectations.

With strong growth outperformances in the western developed economies, one could have expected inflation to have similarly outperformed expectations. Of course, one would have been wrong. In fact, US and euro area inflation is underperforming expectations held at the start of the year, while UK and Canada inflation is only marginally (0.1ppt and 0.2ppts, respectively) higher than start-of-year expectations. So, how is it that the major developed economies’ growth rates could have turned out to be so much stronger than expected over the year, without causing higher-than-expected rates of inflation?

The answer is the other big surprise of 2023: interest rates. Or more precisely, the extent of monetary policy tightening by central banks. At the start of the year, forecasters were anticipating that the Fed, and the BoC would be cutting rates by now, with expectations that the fed funds rate would be 4.25% and the BoC’s overnight target rate would be 3.75%. Forecasters also expected little change over the year in the ECB deposit rate (2.9%) and the BoE Bank Rate (4.25%), with both forecasts proving to be wide of the mark, with the ECB deposit rate currently at 4.0% and the BoE Bank rate at 5.25%.

So, the big story of 2023 is the way central banks of the major developed economies successfully kept inflation expectations from climbing as economic growth exceeded expectations throughout the year. One can but imagine what growth would have looked like, and where interest rates would be now, had central banks not got onto the front foot with pre-emptive rate hikes throughout the year.

It appears that central banks have pulled off the nigh impossible soft landing and the global economy is back on the Goldilocks path of growth that is not too hot to generate excessive inflation and not too cold as to dive into recession.

From all of us in QIC’s Economics & Research team, we wish you an enjoyable and safe festive season and we will be with you again on January 12^th for our first Weekly Economic Brief of 2024.