International Finance Center "Global Economic Downside Risks Prevail"
Moderate Weakness of the US Dollar Expected
[Asia Economy Reporter Seo So-jeong] Global investment banks (IBs) forecast that next year, the economic growth rates of the United States and the Eurozone will sharply slow to 0.2% and -0.2%, respectively. Japan's economic growth rate is expected to be 1.4% next year, while China is anticipated to achieve growth close to 5% due to the easing of zero-COVID policies and economic stimulus measures. The global economic growth rate is projected to slow from 3.1% this year to 2.3% next year.
The International Finance Center held a briefing on the '2023 Global Economy and International Financial Market Outlook and Key Issues' on the 17th at the Bankers' Hall in Jung-gu, Seoul, stating, "The average global growth rate forecast by the eight major IBs is expected to decline to 2.3% next year," adding, "This is the lowest level in 20 years, excluding 2009 (-0.1%) during the global financial crisis and 2020 (-3.0%) amid the COVID-19 pandemic."
While private financial conditions in advanced countries remain favorable and expectations for easing China's lockdown contribute to maintaining growth, the energy shortage and high-intensity monetary tightening are causing contractions in industrial production and construction investment. Growth is sharply declining mainly in the US and Europe, leading to a predominance of downside risks to the global economy.
International organizations have forecast a slowdown in global growth next year while presenting various downside scenarios. The World Bank expects growth to fall to between 0.5% and 1.7% if inflation expectations worsen, and the Organisation for Economic Co-operation and Development (OECD) projects growth could drop to 1.8% if the energy shortage in Europe intensifies.
Despite passing the peak of inflation, persistent high prices may lead to further strengthening or prolongation of monetary tightening. Additionally, sequential economic downturns are expected by country (Eurozone and UK by the end of this year, US by mid-next year), and Citi Bank forecasts a 50% chance of a deep global recession if synchronization intensifies.
The eight major IBs expect the US economic growth rate to sharply slow from 1.8% this year to 0.2% next year. Robust employment and service consumption will support the economy, but reduced investment due to high interest rates and tightening financial conditions raise the possibility of a mild recession.
The Eurozone is expected to enter a mild recession by the end of this year and contract by -0.2% next year. Fiscal spending, a strong labor market, and excess savings will mitigate the impact of negative growth, but the Russia-Ukraine war, energy supply uncertainties, and China's economic slowdown are expected to limit recovery momentum.
Japan is forecasted to grow 1.4% next year following 1.6% growth this year, amid mixed signals from resumed economic activities and overseas economic slowdown. Unlike major countries, Japan is expected to continue accommodative fiscal and monetary policies to support its economy.
China is expected to achieve growth close to 5% next year following 3.1% growth this year, driven by easing zero-COVID policies and economic stimulus. However, the effect of fiscal spending to support the real estate sector is limited, while government fiscal soundness is weakening, increasing difficulties in economic response. Export growth is expected to slow significantly due to reduced demand from advanced countries, and capital outflow pressures from US technology restrictions are anticipated to intensify.
Emerging markets are expected to maintain this year's growth level, with regional differentiation emerging. Vulnerable emerging countries such as T?rkiye (high inflation and external debt), Argentina (exchange rate and foreign currency shortage), and Hungary (energy crisis) will continue to face crisis concerns, while caution toward large countries like India (fiscal and current account deficits) and Brazil (debt and high interest rates) is expected to increase.
The International Finance Center expects financial markets to recover next year amid expanded volatility this year, driven by expectations of inflation and interest rate peaks and monetary policy pivots. However, it noted that confirming the bottom of financial market price variables will take time due to global growth slowdown and liquidity reduction.
The market expects the US policy interest rate to peak around May next year, with IBs forecasting the peak in the first quarter (March). The major IBs' forecasts for the US policy rate peak range from a minimum of 4.75% to a maximum of 5.75%.
The International Finance Center stated, "The US dollar is expected to weaken moderately as the factors driving its strong performance earlier this year gradually weaken," adding, "The extent of the weakening will depend on the relative interest rate differential with the US and the global economic growth trajectory."
In particular, the domestic stock market is analyzed to be influenced mainly by the timing of semiconductor industry improvement and export recovery prospects. Downward pressure on large domestic export stocks will increase due to weakening external demand, but industry conditions are expected to improve after the second quarter.
Furthermore, with the full-scale onset of economic contraction and entry into the late phase of the monetary tightening cycle, bond preference is likely to increase. At the time when expectations for a shift in the Federal Reserve's monetary policy stance spread, capital inflows into emerging markets are anticipated. However, recovery is expected to be led by South America, supported by robust commodity demand, rather than Asia.
The International Finance Center identified vulnerable areas to watch next year as ▲deterioration of US Treasury liquidity ▲currency wars among major countries ▲crisis in Chinese real estate companies ▲worsening credit conditions.
The International Finance Center evaluated, "Global instability will continue next year due to the impact of high-intensity tightening," warning that "there are latent risks such as monetary policy failure, rising credit risk, and sudden shocks in the US Treasury market."
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