Economists split on likelihood of global recession, expect cost of living to remain acute: WEF

Chief economists are evenly divided over the likelihood of a global recession as growth and inflation dynamics vary across regions, but most of them expect the cost of living to remain acute in many countries, according to a survey released Tuesday by the World Economic Forum (WEF).

The WEF's Chief Economists Outlook: May 2023 report, which includes responses from leading chief economists from both the public and private sector, reveals that equal shares of 45% of economists see a global recession this year as likely or unlikely.

However, their responses vary depending on the regions. Asia is where the most buoyant economic activity is expected with China's reopening. Half of the economists forecast moderate, 43% strong economic growth this year in the country.

Accordingly, 93% of chief economists expect at least moderate growth in East Asia and the Pacific while 50% and 75% of chief economists expect weak or very weak growth in the US and Europe this year, respectively.

Latin America and the Caribbean and sub-Saharan Africa remain at the weaker end of the outlook as over half of the respondents predict weak growth.

Economists marked an uptick in inflation in all regions compared to their previous expectations in January 2023.

High inflation is set to continue this year, with 90% and 68% of economists expecting high or very high inflation in Europe and the US, respectively, with 74% and 73% of them seeing high or very high inflation both in sub-Saharan Africa and Latin America and the Caribbean, respectively.

A slight majority also expects the Middle East and North Africa region to record high inflation this year, while China remains an outlier on inflation with only 14% expecting high inflation this year.

According to 79% of the chief economists, central banks will face a trade-off between managing inflation and maintaining banking sector stability while 82% of them expect interest rate rises to slow in the face of financial stability concerns.

Meanwhile, 76% of economists think central banks will struggle to bring inflation to their target rates.

- Further bank failures and financial disruptions highly likely this year

According to 76% of the chief economists, the cost of living will continue to be at crisis levels in many countries.

Cost of living pressures are particularly acute in some developing economies, where domestic price dynamics are exacerbated by currency depreciation, the WEF said in the report.

"With global wage growth struggling to keep up with prices, the risk is that vulnerable communities will be pushed further into poverty, especially under tighter financial conditions," the report cautioned.

However, despite the recent bank collapses and financial market turbulence, the chief economists express confidence in the systemic integrity of global markets.

Some 69% of the respondents characterized the recent distress in the banking sector as "isolated episodes with limited additional impact" while 67% of them say further bank failures or other serious financial disruptions are somewhat or extremely likely in 2023.

More than 80% expect businesses will find bank lending more difficult to secure and also lead to a slowdown in investment and activity in the technology sector as a result of recent financial disruption.

"They also pointed to the knock-on effects of high interest rates, notably in the property sector, where two-thirds expect high rates to cause significant disruption in 2023-2024," the WEF said.

"The latest edition of the outlook highlights the uncertainty of current economic developments. Labor markets are proving resilient for now but growth remains sluggish, global tensions are deepening and the cost of living remains acute in many countries," said Saadia Zahidi, managing director at the WEF, on the findings of the report.

"These results confirm the urgent need for both short-term global policy coordination as well as longer-term cooperation around a new framework for growth that will hardwire inclusion, sustainability and resilience into economic policy."