The year 2023 will likely be another tough period for the global economy since high inflation rates, lower oil and gas supplies, disrupted supply chains, labor strikes and central banks raising interest rates will continue to impact the international business markets. We will see global consumption dampen along with more households struggling to pay for daily necessities, and persistent sky-high energy prices and food insecurity becoming a more prevalent problem across the globe.
Amid the ensuing challenges, the chances for an unexpected global economic rebound appear to be fading. The world is undergoing a dramatic transition with inflation sparking more social unrest and it will lead to a tumultuous labor market with the likelihood that labor strikes would obstruct vital links to global supply chains, logistics services and transportation as turning more common for the year ahead.
The ongoing Ukraine-Russia conflict will also cause global gross domestic product (GDP) growth to slow down, while the International Monetary Fund (IMF) has forecast the growth rate to fall to 2.7 percent for 2023, as compared to 3.2 percent in 2022 and 6 percent in 2021.
The IMF warned last October that more than a third of the world economy will contract and there is a 25 percent possibility of global GDP expanding by less than 2 percent next year, which it defines as a global recession.
Strong labor market not sustainable
The United States and European economies remain resilient in regards to their respective labor markets. They have enjoyed low unemployment rates, not seen in decades. Nonetheless, corporate earnings have weakened overall and this trend is gaining momentum. Companies are confronting multiple difficulties such as high inflation rates, averaging about 8 percent in the U.S. and over 10 percent in the United Kingdom.
The soaring prices narrow profit margins for companies as they must purchase supplies at higher rates while the central banks increase borrowing costs by raising interest rates. The U.S. Federal Reserve has raised its benchmark rate to 4.5 percent, as of December 2022, while U.S. Fed Chairman said he would continue on with rate hikes for 2023, some Fed policymakers have signaled the rate would hit a peak at 5.25 percent by the end of 2023.
Accordingly, many employers will endure serious struggles since more workers will demand higher wages to adapt to the prolonged high inflationary period. When employees have a harder time to pay for food, housing, transportation, and basic necessities they will seek higher wages or will look for more gainful employment elsewhere.
But if companies agree to higher labor wages that will increase operational costs resulting in further inflation to consumers. The vicious cycle of higher inflation and higher labor wages will hurt the Middle Class and salaried workers. They must incur the burden of higher cost of living without having more money in their pockets.
The conundrum here is known as “stagflation” in which inflation rates are higher than the GDP growth rates. Hence, economic growth does not benefit ordinary people. Nonetheless, workers struggling to survive financially have few options but to make higher wage demands on their employers.
UK rail strikes, a sign of the times
According to UK-based media reports, Thousands of people had confronted Boxing Day (British holiday) travel disruptions across the UK since a rail strike means no services were operating. Many people had to cancel or make alternative transportation plans.
Nevertheless, Network Rail said Britain’s railways were shut down for a second consecutive day on account of a strike by employees who are members of the Rail, Maritime and Transport union (RMT).
The strike is part of a long-running dispute between the RMT and the train operators and Network Rail over pay, jobs and conditions. Thousands of members of the RMT union at Network Rail went on strike from 6 p.m. on Christmas Eve to 6 a.m. on December 27.
The RMT is not the only labor strike in the UK. Many nurses staffed by the NHS (National Health Service) went on strike earlier this month demanding more fair pay and better work conditions.
Some good news from China
Although the global economic outlook appears bleak for the year ahead, we could see a dramatic rebound of China’s economy as the country finally shifts away from the ‘dynamic zero COVID-19’ policy to focus more on economic growth.
According to Xinhua, the annual Central Economic Work Conference was held in Beijing on December 15-16 as Chinese leaders selected priorities for the economic work in 2023.
“China will accelerate the building of a modern industrial system, according to the meeting. Efforts will be made to identify the weak links in key and core technologies as well as components and parts in the country’s major manufacturing industrial chains, and pull together resources to tackle the problems so that the industrial system is independent, controllable, safe and reliable, said the meeting,” as reported by Xinhua.
Therefore, China will likely emerge as the main driver for global economic growth next year while other regions and countries are stumbling.
