The global economy shows signs of steadying, however, many indicators remain weaker than a year ago, according to the Global Economic Conditions Survey (GECS) for Q4 2022 from ACCA (the Association of Chartered Certified Accountants) and IMA® (Institute of Management Accountants).
The Q4 report shows the GECS Confidence Index bounced slightly for the second consecutive quarter, perhaps reflecting hopes that the worst of the central bank tightening might soon be over, and that China might successfully relax its zero-COVID restrictions.
Even so, the Confidence Index remains below its median reading for the period since 2012. There is also not much positive news from the other three economic indicators – new orders, capital expenditure (CapEx), and employment.
CapEx picked up marginally but remains below the median of the same period; new orders and employment showed a further modest deterioration.
Taken as a whole, the results are consistent with a subdued macro-economic outlook. But the good news is that they do not appear yet to be at levels consistent with an outright global recession in 2023 – even though this is the base case scenario for many economic forecasters.
A good cross-check is provided by the two GECS “Fear” indices, which reflect respondents’ concerns that customers and/or suppliers may go out of business. Reassuringly, these were little changed from the Q3 2022 survey, despite the sharp rise in borrowing costs and the prospect of negative corporate-earnings growth in 2023.
“What stands out is the improvement in confidence in both Western Europe and North America,” said Jamie Lyon, head of skills, sectors and technology at ACCA.
“The swing in the former more than reverses the fall that we saw in Q3 2022, when worries about the impact of higher energy prices were at their most intense. The improvement in confidence probably reflects hopes that the Russia–Ukraine conflict can be contained, and that there will be sufficient natural gas to see Europe through what now looks increasingly likely to be a mild winter. Looking to the rest of the world and emerging markets however, 2023 could still prove to be a challenging time.”
Looking back at 2022, North American results were particularly striking in how severely confidence was reduced by Russia’s invasion of Ukraine and by the ensuing spike in commodity prices. The GECS Confidence Index for North America in Q2 2022 actually fell below the 2020 pandemic lows.
It has begun to recover during the GECS Q3 and Q4 2022 – and that is despite the aggressive tightening of monetary policy by the U.S. Federal Reserve.
Interestingly, while the other macro-economic indicators – on capital spending, employment, and new orders – have pulled back, the retracement has not been as severe. The GECS results suggest that North American respondents may be less worried than they were about Ukraine, but the risk is that they could be underestimating the impact of the Fed’s tightening on the U.S. economy in 2023.
“Global confidence has edged up for the second consecutive quarter as cost concerns have eased and with worries about accessing finance and securing prompt payment having not gotten any worse,” said Loreal Jiles, vice president of research and thought leadership at IMA.
“This is something of a surprise given the global rapid tightening of monetary policy by the world’s central banks. The past 12 months have seen the most aggressive tightening of policy in more than 40 years, in pace, scale and breadth. It is strange that this has not yet had a material impact on financing conditions and corporate cash flows. But monetary policy works with long and variable lags, which suggests that this may become more of a problem later in 2023.”
The global economy faces three major uncertainties.
First, have central banks overdone or underdone the amount of tightening that they have imposed?
Second, can China engineer a smooth exit from zero-COVID without additional lockdowns?
And third, will wage pressures ease without a major weakening of the employment market?
One of the unresolved questions from the COVID crisis is whether the combination of early retirement, prolonged ill health, and the move to hybrid working has profoundly altered the balance of power between employers and employees. These changed employment-market dynamics may make it harder for central banks to bring core inflation back to their 2% targets.
