The global economy remains exposed to multiple shocks amidst escalating geopolitical tensions, a slowdown in China’s economy, unsustainable rates of inflation and tighter monetary policy. Worsening economic conditions are likely to lead to “the third weakest pace of growth in nearly three decades overshadowed only by the global recessions caused by the pandemic and the global financial crisis,” according to the World Bank (World Bank, 2023). While inflation is expected to steadily decline this year, core inflation will remain high. This will lead to further increases in interest rates in early 2023 and persistently high interest rates throughout the year. Against the weakened economic backdrop, world trade is expected to grow by a mere 1 percent in 2023. Growing interest in supply chain security will lead to a challenging trade and investment landscape in the coming year.
1. Macroeconomic Outlook: Rising Risk of Global Recession
The market outlook points to a continued slowdown in global GDP growth in 2023. The International Monetary Fund’s (IMF) World Economic Outlook, released in October 2022, forecasts that global growth will drop to 2.7 percent in 2023 from 3.2 percent in 2022 and 6.0 percent in 2021 (IMF, 2022). The slowdown reflects the convergence of stagnation (and stagflation) in the US, EU, and China. The World Bank is far more pessimistic and projects that the world economy will grow by just 1.7 percent in 2023, nearly half of their earlier forecasts (World Bank, 2023), and in line with projections of the Economist Intelligence Unit (EIU, 2022).
Figure 1: Real GDP Growth, 2023
Source: Economist Intelligence Unit
Inflation, which has remained stubbornly high at 8.8 percent in 2022 as supply chains struggled to recover post-pandemic, is expected to steadily decline to 6.5 percent in 2023 and 4.1 percent by 2024 (IMF, 2022). The Federal Reserve (Fed), the European Central Bank (ECB) and the Bank of England (BoE) have all hiked interest rates rapidly over the past few months as inflationary pressures continued to weigh on the global economy. A September 2022 World Bank Report highlights that “the global economy is in the midst of one of the most synchronous episodes of monetary and fiscal policy tightening of the past five decades (World Bank, 2022).” The Fed, the ECB and the BoE have already signalled that this trend is expected to continue in early 2023.
Figure 2: Evolution of Central Bank Interest Rate Actions (2015-2022)
Sources: Bloomberg, and IMF staff calculations
Note: The AE sample consists of Australia, Canada, Czech Republic, Japan, New Zealand, Norway, Sweden, Switzerland, the United Kingdom, the United States, and the countries in the European Union (under ECB jurisdiction). The EM sample consists of Brazil, Chile, Colombia, Mexico, Peru, India, Indonesia, Malaysia, Philippines, Thailand, Hungary, Poland, Romania, South Africa, Turkey, Pakistan, Croatia, Russia, Ukraine, Egypt, and Ghana.
The unprecedented energy crisis in Europe, brought about by the Russia-Ukraine war, will continue to increase prices on consumer and industry expenditures. Spiking import bills for fuel, food, and fertilizers in addition to the strong dollar may well cause food insecurity and debt distress in developing countries. Higher interest rates in the United States will lead to a cutback in expenditure on housing, motor vehicles and fixed investment. And the COVID-19 surge in China coupled with production disruptions and weak international demand is expected to result in subdued domestic consumption and lower commodities demand in the country.
Slower global GDP growth and rising costs of financing borrowing will lead to higher default rates in 2023 and 2024. According to S&P Global Ratings, in the case of a shallow recession, US and European corporate default rates will increase to 3.75 percent and 3.25 percent respectively by September 2023, more than double the September 2022 levels of 1.6 percent and 1.4 percent (Reuters, 2022). These figures may reach 6.0 percent and 5.5 percent in the event of a deeper and longer recession. Credit quality of sovereign debt, which has surged over the past two years due to the pandemic, is also expected to worsen. Emerging market economies, mostly net importers of food and energy which have high exposure to foreign-currency debt, will be hit the hardest. Dwindling real incomes and increase in mortgage costs will also put pressure on household finances.
2. Global Trade Outlook: World Trade Expected to Flounder
Against a weakened global economic backdrop, growth in world trade is expected to slow to a trickle, with merchandise trade volume slowing down to 1.0 percent in 2023 from 3.5 percent in 2022 (World Trade Organisation, 2022). According to the WTO, substantial export growth is expected in Commonwealth of Independent States countries (3.3 percent), and moderate growth in North America (1.4 percent) and Asia (1.1 percent).
Figure 3: Merchandise Trade, 2015-2023
Source: World Trade Organisation
Uncertainty in the transportation of Russian energy products may cause global trade patterns to shift. Effective December 5, 2022, the European Union (EU) prohibited the import or transfer of seaborne crude oil from Russia to the EU for purchases above the G7 price cap of $60 per barrel, representing around 90 percent of Russian oil imports into the EU. This ban will be further extended to other refined petroleum products in February 2023 (Council of the European Union , 2023). In case insurance and shipping firms are barred from transporting Russian energy products above the G7 price cap, international energy supply will decrease significantly, and trade patterns will change globally. The Russian invasion of Ukraine has already led to the emergence of new trade patterns and greater inefficiencies in the shipping sector. Asia’s demand for Russian oil as well as the EU’s need to diversify its oil sources have resulted in increased in ton-mile demand and high freight costs. This situation is expected to persist in 2023 amid a challenging upcoming winter season due to minimal Russian gas flows to the EU (S&P Global, 2022).
3. Policy Uncertainty and other Expected Disruptions to Trade
Export bans, subsidies and sanctions will continue to make trade headlines in 2023. An increasing number of countries are introducing export bans on strategic metals and minerals. The Indonesian Government announced a ban on exports of bauxite, the world’s main source of aluminium, starting from June 2023 (ASEAN, 2022). This move follows the introduction of Indonesia’s ban on exports of raw nickel in January 2020 which resulted in significant investments in new smelters in the country. Indonesia is also considering a possible ban on exports of raw tin. Zimbabwe, the world’s sixth-largest producer of lithium and the largest lithium miner on Africa, has implemented a ban on unprocessed lithium exports which took effect in December 2022 (Quartz, 2022). The United States introduced subsidies and tax cuts to promote electric vehicles and other green products made in North America in August 2022, sparking tensions with Europe and South Korea (Economist Intelligence Unit, 2022). It remains to be seen if the EU or South Korea will escalate the matter to the World Trade Organisation (WTO) or will engage in a harmful subsidy race that will create inefficiencies and market distortions. The EU Enforcement Trade Regulation, which allows the EU to retaliate in a situation where its counterparty fails to cooperate on dispute settlement, is likely to receive more attention in 2023. The WTO ruled in favour of the EU in a dispute with Indonesia over the ban of nickel ore exports and Indonesia appealed this decision in December 2022 (Jakarta Post, 2022). With the WTO appellate body at a deadlock, the EU may trigger its own (internal) Trade Enforcement Mechanism to find a solution.
The downward spiral in US-China diplomacy is the biggest geopolitical risk for businesses in 2023. Despite signs of US-China relations getting warmer with the Heads of State meeting on the sidelines of the G20 summit in November, competition with China will remain the main priority that determines the Biden administration’s economic policies. The decoupling of supply chains is likely to continue as the US looks to reduce its reliance on China, particularly for rare-earth materials, a sector in which China owns 80 percent of the world’s refining capacity. Since October 2022, the US has introduced extensive restrictions on the type of chips that can be sold to China and on who can work for Chinese companies while simultaneously offering USD 39 billion to subsidise building semiconductor manufacturing factories domestically (MIT Technology Review, 2023). The US chip ban is seen as an attempt to curb China’s access to critical technologies, from supercomputing to guiding weapons, and their use for the East Asia country’s military and economic ambitions. Compared to the crackdown on Huawei a few years ago, this move is much broader in scope and will affect not only Chinese firms but also other large chip makers with facilities in China (for example, China accounts for 5.5 percent of America’s wafer capacity), not to mention the other downstream producers of semiconductors industries (International Economics Consulting, 2022). The technological blockade against China will likely intensify in 2023 and the country may be hit with more restrictions in the form of additional export controls, a review process for US outbound investment, or other actions aimed at chip-adjacent industries such as quantum computing. This will lead to further disruptions in the production value chain impacting industry efficiency and global productivity. While the weaker demand has improved the supply of leading-edge and advanced-node semiconductors, the shortage of legacy chips that are used by automotive and industrial companies is expected to persist in 2023 (Roland Berger, 2022).
Reporting requirements for the EU’s carbon border adjustment mechanism (CBAM) will enter into force on October 1, 2023. The EU’s CBAM aims to rectify any asymmetries in the carbon pricing policies of different countries where either carbon taxes have not been implemented or where carbon taxes are not commensurate with European levels. A three-year transitional period will begin in October 2023 whereby importers from concerned sectors will have to report on the level of embedded carbon in their products (Council of the European Union , 2022). As of January 2026, all importers will be required to purchase CBAM certificates based on the EU’s emissions trading scheme carbon price. The CBAM will increase the cost of exports and is likely to lead to trade tensions between the EU and its trading partners. The Centre for European Reform estimates that carbon taxes could hit USD 16 million of developing country exports to the EU if preferential treatment is not extended to the CBAM for these countries (Reuters, 2021). In Africa, Mozambique and Egypt will have the highest share of total exports exposed to an EU CBAM, while South Africa has the largest value of exports likely impacted (International Economics Consulting , 2022).
4. Continued appetite for Trade Agreements in 2023
Several new trade agreements are expected to be signed this year. India will be particularly busy as it seeks to seal agreements with Australia, and the United Kingdom in early 2023. The country also aims to complete negotiations with the EU by the end of this year although this is unlikely to materialise due to complexities associated with negotiating with the bloc of 27 members. An EU deal would potentially double trade between the parties within five years (CNBC, 2022). Australia is pushing to close a free trade agreement (FTA) with the EU in the first half of 2023, and it is expected that the Australia-UK deal will come into force if the UK parliament passes it. Last week, Ecuador announced that it has successfully concluded FTA negotiations with China. ASEAN, Australia, and New Zealand plan to sign an upgrade to their existing FTA in Spring 2023. Continued negotiations on the Continental Free trade Area will continue in 2023 to cover digital trade. Finally, the 13th round of the EU-Indonesia Comprehensive Economic Partnership Agreement (CEPA) negotiations is scheduled for February 2023.
Indonesia will assume the Chairmanship of the Association of Southeast Asian Nations (ASEAN) bloc in 2023. The Jokowi administration announced the country’s chairmanship theme as “ASEAN Matters: Epicentrum of Growth”, highlighting the economic focus that will be high on the agenda in 2023 (Australian Strategic Policy Institute, 2022). Indonesia, the region’s largest economy that is considered first among equals in ASEAN, laid the foundations for the world’s largest FTA by members’ GDP, the Regional Comprehensive Economic Partnership Agreement. While the upcoming 2024 presidential and general elections will dampen Indonesia’s participation in foreign policy matters, the country will likely replicate the economic success of its 2022 G20 presidency. It is expected that Indonesia will drive the strategy to position ASEAN in the post-pandemic global economic order while strengthening regional value chains to advance the regional integration agenda.
In 2022, International Economics Consulting supported the Government of Indonesia’s preparations for its role as the 2023 incoming Chair of ASEAN, by preparing four detailed quantitative studies, based on extensive consultation with the industry leaders and supply chain operators in ASEAN, to consider the opportunities to better integrate into the unexploited segments of the ASEAN Regional Value Chains (RVCs). The studies looked on the reinforcement of regional cooperation on three potential sectors of electronics, automotive and medical devices. Details on this project can be accessed here.
The Indo-Pacific Economic Framework for Prosperity (IPEF), launched in May 2022, is likely to gain momentum. The IPEF is structured around four main pillars namely Connected Economy (trade), Resilient Economy (supply chains), Clean Energy and Fair Economy. Except for India which opted against negotiating the trade pillar, all other IPEF countries have joined all four pillars, sending a strong signal of wishing to engage with the United States (Center for Strategic and International Studies, 2022). The supply chain pillar has received the most interest from participants so far. There are strong expectations that the IPEF will create an information-sharing mechanism that will support more secure and resilient supply chains in which IPEF members are eager to play a role. The next round of negotiations, which will focus on all pillars except trade, will take place in India in February 2023. Washington aims to ambitiously complete negotiations ahead of the US-hosted Asia Pacific Economic Cooperation Leaders’ Meeting scheduled for November 2023.
Digital trade will continue to emerge as an important global economic pillar and more significant Digital Economy Partnership Agreements (DEPA) will materialize. While recent bilateral and regional trade agreements have included provisions on multiple aspects of digital trade, the DEPA is a new international trade policy instrument which focuses on emerging digital economy issues including artificial intelligence, fintech, digital inclusion, and digital identities. In 2020, the first DEPA open to all WTO members was signed between Chile, New Zealand and Singapore and the agreement entered into force in January 2021 (World Economic Forum, 2022). Singapore signed its second DEPA with Australia in 2020. The UK-Singapore Digital Economy Agreement entered into force in June 2022 after only six months of negotiations while the Korea-Singapore DEPA was signed in November 2022. ASEAN is also considering its own regional digital economy agreement that will be discussed in 2023.
Figure 4: Inside the Digital Economy Partnership Agreement
Source: Asia Pacific Foundation of Canada
Note: On February 16, 2021, Canada started exploratory discussions with the DEPA parties for possible accession to the agreement.
The probability of recessions across major economies in 2023 has increased considerably with the simultaneous slowdown in the US, Eurozone, and China. The global downturn will lead to increasing divergence in growth between advanced economies and emerging economies. And not surprisingly, more vulnerable countries, many of which borrow in U.S. dollars, will be hit the hardest as interest rates continue to rise. Faltering demand and supply chain security concerns will weigh on global trade while increasing protectionism and disruptions due to geopolitical events will increases trade costs.
Businesses must brace for another difficult year with great uncertainties. As uncertainty continues to heighten, predictions will become less relevant. However, scenario planning and risk-mitigation strategies can help companies prepare for what lies ahead. Innovation and continued digitalisation efforts should also be at the forefront of the business agenda, not only to adapt to the changing global environment but also to capitalise on the unique growth opportunities that unexpected events may create.
CEO Insights is a monthly publication of International Economics Consulting Group (IEC). IEC is an independent consultancy group working with governments, international development partners, and the private sector to navigate trade opportunities and promote sustainable growth and development. IEC provides strategic advisory services underpinned by research and quantitative analysis to assist organisations, governments, and businesses in anticipating risks, building resilience, mitigating impacts, and supporting clients on recovery against economic shocks. Learn more about the services that IEC provides here.
Paul Baker is the founder and chairman of International Economics Consulting Group (IEC), a globally recognised consulting firm. Nominated for seven consecutive years in Who’s Who Leading Trade Economists, he has advised several G7, G20 and G90 governments in developed and developing countries, an adviser on global corporate strategies to multinationals, and a Visiting Professor at the College of Europe. Paul is an expert in the Working Group of the World Economic Forum’s (WEF) Digital Flows Initiatives, an Expert in the WEF/WTO’s Trade Tech Working Group and is on the Board of the United Nations Economic and Social Commission for Asia Pacific’s Trade Intelligence tools. He is also a member of the UK’s All Party Parliamentary Group on Trade and Investment, and a regular contributor to the UK Parliament’s Trade Select Committee, and UN panels on trade impact analysis.
 The CBAM will only cover the following carbon-intensive sectors to begin with: iron and steel, cement, fertilisers, aluminium, electricity, and hydrogen, as well as some precursors and a limited number of downstream products.
 The agreement entered into force in January 2022 for Australia, Brunei Darussalam, Cambodia, China, Japan, Laos, New Zealand, Singapore, Thailand and Vietnam. It came into effect in February 2022 for the Republic of Korea, March 2022 for Malaysia and January 2023 for Indonesia.
 The 14 IPEF countries include: Australia, Brunei Darussalam, Fiji, India, Indonesia, Japan, Korea, Malaysia, New Zealand, Philippines, Singapore, Thailand, Vietnam and the United States.
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