Will global economic resilience last?

Hi, I’m Adam Slater, Lead Economist at Oxford Economics. A recent topic we’ve been looking at is global economic resilience and whether it will last. Now the world economy performed better in the final months of 2022 and early 2023 than might have been expected, given the scale of the inflation and interest rate shocks it suffered. rnrnOur analysis suggests that the sharp drop in energy prices from their peak, fiscal intervention and low US savings have helped. While structural changes may have delayed the full impact of the monetary shock. Nevertheless, we think growth is likely to be weak in the next few quarters. To try to understand the cross-currents affecting the world economy, we’ve used the Oxford Global Economic Model. What we did was to mimic the commodity, energy and interest rate shocks suffered by the world economy since 2021. rnrnComparing our simulation with the actual data. We found that the level of world GDP is currently around 1% higher than the simulation would have predicted. One factor supporting world output has been the steep fall in energy prices since Q3 2022, especially in Europe. And the impact of this may have been underestimated both in our model simulation and more generally. Consumer spending in the G7 has also been supported by government intervention, which blunted the pass through of energy price rises to households and by low savings rates in the US. rnrnNow, thinking about the monetary shock, there are two possible linked issues. How large an impact monetary tightening has on the economy? And over what time scale? Recent economic resilience could reflect either or a mix of the two. It’s possible the impacts so far have been smaller than our simulation predicted and was expected more broadly. It’s notable that the overall tightening in financial conditions has been smaller than our model simulation predicted and that the effects on key asset prices are showing signs of leveling off. But we think it would be premature to conclude that the shock to the world economy from monetary tightening has already played out. rnrnThere’s a lot of uncertainty about how much rate rises affect output, and there are good reasons for thinking that the full impact of monetary tightening is yet to be felt, especially via money and credit channels. It’s possible that the peak impact of monetary tightening on GDP has been pushed out further than our model simulations suggest. As a result, our baseline forecast still looks for growth in the advanced economies to slip into negative territory at the end of 2023 or 2024.