Economists predict 2023 recession — but naysayers still scoff

On the threshold of 2023, a mystery plays on the minds of economists and regular folk worldwide – will there be a recession?

The latest entry in the yes column is from the Centre for Economics and Business Research in the UK. In its report, World Economic League Table 2023, the world’s economy will grow, but sees a hiccup during the year.

“We estimate that it will amount to $102 trillion for 2022 as a whole and will roughly double to $206 trillion in 2037,” the report said of the global GDP. “But in the short term, there is likely to be a growth recession in 2023 as a result of the aftermath of high inflation in 2022.”

Underdeveloped countries will be leaders in growth, even overtaking traditionally rich nations, according to the report. China is expected to lose steam rapidly. Two years ago, the economists predicted that China would become the world’s largest economy by 2028. They pushed that to 2030 last year and to 2036 in this report.

The country to watch is India, which is “unstoppable” in becoming the world's third superpower.

“It [India] has consolidated this position and is forecast to overtake Germany to become the world’s 4th largest economy in 2026 and to overtake Japan to become the world’s 3rd largest economy in 2032,” the economists wrote.

The economists described the tone of this report as turned “much more pessimistic” largely because of the war in Ukraine and rising international tensions. They also said that central bankers had squandered their chance to avoid recession.

“It is likely that the world economy will face recession next year as a result of the rises in interest rates in response to higher inflation,” wrote Kay Daniel Neufeld, CEBR director and head of forecasting. “Central banks were very slow to realize the scale of the inflationary problems about which we have been warning and, as a result, the rises in interest rates and the monetary deceleration have been abrupt. The good news is that inflation should fall quite quickly, the bad news is that in many countries it will take a recession to make this happen.”

Goldman sunny on 2023

Perhaps a surprising recent addition to the “no recession” side is Goldman Sachs, predicting a soft landing in 2023.

“The world’s largest economy is forecast to narrowly avoid a recession as inflation fades and unemployment nudges up slightly,” the firm said in an article.

The U.S. is nowhere near a recessionary level of economic activity, according to Goldman. The GDP grew 2.6% annualized in the third quarter and has been adding hundreds of thousands of jobs per month.

The Goldman economists set the likelihood of recession at 35%, while acknowledging that a Wall Street Journal poll of economists found a 63% chance of a recession in an October survey, up from 50% in July.

Goldman cited a growth in real personal income, increasing disposable income 3% over the next year, a point more than projected inflation.

Economists have not grown more optimistic since October. The December Bloomberg poll of economists pegged the probability of a recession at 70%, up from the 65% in November.

They expected slim growth next year at 0.3%, with a 0.7% decline in the second quarter and flat for the quarters before and after. Surging interest rates, inflation and the end of the Fed’s fiscal stimulus were cited as factors.

A CNBC poll of Federal Reserve economists found they predict a 61% chance of a recession next year, most likely starting in June. The start date is consistent with what economists told Bloomberg. But most economists believe the downturn will be moderate.

The Fed raised rates another 50 basis points this month, to the highest funds rate in 15 years. It is expected to continue raising at least another 75 basis points next year, reducing economic growth even further.

Wage growth a driver

Although Goldman Sachs’ economists cited wage growth as a positive sign, a USA Today article points out that economists say the increase is a key factor in pushing the U.S. into a recession.

It is rapid wage growth that is fueling inflation, pushing the Fed to raise rates to slow the economy. Although wages dropped to 5.2% in the third quarter, down from 5.7% earlier in the year. Even with the drop, it is above the typical 3.3% average. Although inflation has also dropped, it is still at a high 7.1%. And it is expected to stay high because of wage growth.

“The spike in wage growth is contributing to inflation because employers with high labor costs typically raise prices to maintain profits,” according to the article.

Fed Chair Jerome Powell said during the central bank’s meeting this month that wages are a key factor in raising rates.

“It’s not that we don’t want wage increases, we want strong wage increases,” Powell said, according to The New York Times. “It’s just that we want them to be consistent with 2 percent inflation.”

Powell said the U.S. is suffering from a stubborn, structural labor shortage that will likely remain into 2023. Although the labor shortage is helping fuel inflation, it also leads Powell to say that he is hopeful that the shortage will mean just a small increase in unemployment as the economy slows next year, according to the Times.

Another one on the “no recession” team is Jeffrey Frankel, a Harvard professor and a member of the Council of Economic Advisors under President Bill Clinton, who said the projected slowdown would not be enough to call a recession.

“While next year will be rough for the world economy, the coming slump probably should not qualify as a recession, even considering that the two-consecutive-quarters criterion is too narrow,” Frankel wrote in a column in The Guardian. “Even in times of apparent recession, positive growth among emerging and developing economies tends to outweigh advanced economies’ negative growth.”

Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].

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Steven A. Morelli is a contributing editor for InsuranceNewsNet. He has more than 25 years of experience as a reporter and editor for newspapers and magazines. He was also vice president of communications for an insurance agents’ association. Steve can be reached at [email protected].