Economic news: Europe and China face weaker growth

by MMC
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  • This weekly overview presents the latest news from the world of economics and finance.
  • Economic Highlights: Europe faces weaker economic growth; Global debt falls for second year but trend may soon stop; China’s economy is expected to grow more slowly than expected.

1. ECB raises rates to record high as Eurozone faces weaker economic growth

Record interest rates have been put in place by the European Central Bank (ECB), as the European Commission says Eurozone growth will be weaker than expected this year following “moderate” economic activity in January-June.

The ECB raises its key rate to 4% – its 10th increase in 14 months – in a move it hopes will make a “substantial contribution to the timely return of inflation towards the” 2% target.

Inflation was 5.3% in July, according to the European Commission, but it expects an average of 6.5% this year. And it raised its inflation forecast for 2024 to 3.2%, from 3.1% earlier this year.

The Commission also revised downwards its 2023 economic growth forecast for the euro area by 0.2 percentage points, to 0.8%. And it lowered its forecast for 2024 by 0.3 points to 1.4%, saying the slowdown in growth momentum is expected to continue as restrictive monetary policy impacts economic activity.

European economic forecasts summer 2023

Europe faces weaker growth than expected in 2023 and 2024.

Image: European Commission

Growing risks linked to the climate crisis are also weighing on the outlook, according to the Commission. Forest fires ravaged southern Europe this summer and extreme heat poses major threat to continent’s $2 trillion travel industry. Travel and tourism constitute 6.2% of European GDP.

“The multiple headwinds our economies are facing this year have led to weaker growth dynamics than we anticipated in the spring,” said EU Economy Commissioner Paolo Gentiloni. “Inflation is falling, but at different rates across the EU. And Russia’s brutal war against Ukraine continues to cause not only human suffering but also economic disruption.”

2. Geopolitics will create economic volatility in the coming year

Economic volatility is very likely in the coming year, with geopolitics being one of the main causes, according to the The new World Economic Forum Perspectives from Chief Economists.

Nine out of ten chief economists surveyed for the report believe geopolitics will disrupt the global economy. Domestic politics could also fuel economic volatility according to 79% of respondentswith the impending US election cycle likely being a driver of this sentiment.

As a result, 61% of chief economists surveyed believe the global economy will weaken in the coming year.

Global Economic Outlook.

The global economy is expected to weaken over the next 12 months.

Image: World Economic Forum

But optimism reigns when it comes to inflation, with 86% of chief economists believing that the peak of the global inflationary surge will have eased within a year.

The situation varies across the world, however: the United States is seen as heading toward moderate or low inflation, while Europe is expected to face high or very high inflation. Deflationary pressures in China mean 81% of chief economists expect low or very low inflation in the country this year.

That said, Asia is seen as having the strongest growth prospects: 92% of respondents expect South Asia to see moderate or strong growth this year.

But the hope of reaching the UN Sustainable Development Goals (SDGs) by 2030, are at risk due to global economic difficulties. Almost three-quarters of respondents believe geopolitical tensions will hinder progress toward global development goals over the next three years, while 59% expect tighter financial conditions to have the same effect.

3. Global debt falls for second year but trend could soon stop, says IMF

Global debt fell for the second year in a rowbut it remains “stubbornly high” after accelerating during the pandemic, according to the International Monetary Fund (IMF).

Total debt now stands at $235 trillion, or 238% of global GDP – down from 258% in 2020, but still above the 229% recorded in 2019.

Public debt has only fallen by 8 percentage points of GDP over the past two years, meaning it has only offset half of the increases associated with increased spending due to COVID-19.

China has played a significant role in this phenomenon, says the IMF, with its borrowing outpacing its economic growth. China’s non-financial corporate debt is also the highest in the world, at 28% of GDP. (For more on the Chinese economy, see the News in Brief section below.).

Global debt

Global debt has fallen for the second year.

Image: IMF

“Budget deficits have kept public debt levels high as many governments have spent more to boost growth and respond to soaring food and energy prices, even as they have ended budgetary support linked to the pandemic”, indicates the IMF.

“Governments should take urgent action to help reduce debt vulnerabilities and reverse long-term debt trends. Reducing the debt burden will create fiscal space and enable new investments, helping to foster economic growth in the years to come.

4. News in brief: Economic stories from around the world

China’s economy expected to grow more slowly than expected. Growth of 5.0% is likely this year, according to a Reuters poll of economists, down from the 5.5% forecast in July. Retail sales and industrial production grew faster than expected in Augustbut a major slowdown in the real estate market This situation weighs heavily on the economy: around 70% of household wealth is found in the real estate market.

Chinese companies will also face a stricter approval process when making bulk purchases in US dollars., as the central bank seeks to counter the growing risks of currency depreciation. The yuan has fallen 6% against the dollar this year, leaving it at its lowest level since the 2008 financial crisis.

U.S. consumer prices rose in August at their fastest pace in 14 months, up 0.6% over the month. Gasoline was the biggest factor, and the rise means annual inflation has risen for two consecutive months, bringing it to 3.7%. But core inflation – excluding food and energy – rose by its smallest amount since September 2021, meaning the Federal Reserve may refrain from raising interest rates next week.

THE UK GDP contracted more than expected in July, with a drop of 0.5% over the month. Heavier than usual rains hit retailers and the construction sector, and hospital strikes also weighed on the economy. But broader signs point to a weakening economy, with UK unemployment rate rises and the number of vacancies falls below a million for the first time in two years.

The World Economic Forum Platform to shape the future of trade and investment informs business and policy action on critical choices in international trade and investment, driving inclusive growth and development by working with business, governments and civil society.

Contact us for more information on how to get involved.

Russia raises its inflation forecasts for the next two years, at 7.5%, compared to a forecast of 5.3% in April, as the economy faces growing costs linked to the war against Ukraine. The Ministry of Economy also expects the ruble to weaken against the US dollar. THE the ruble recently fell below the psychological barrier of 100 per US dollar.

Argentina’s annual inflation rate reached 124.4%, with soaring commodity prices pushing poverty levels above 40%. Prices increased by 12.4% in August alone compared to July.

Annual wholesale inflation in Japan – a measure of what businesses charge each other for goods and services – fell to 3.2% last month, from 3.4% in July. But Japanese manufacturing confidence has fallen due to concerns about the impact of China’s economic slowdown on global growth.

Corporate defaults exceeded average levels in August, indicating growing tensions related to interest rate hikes and pending debt maturities. There were 16 new defaults last month, well above August’s average of 8.6. The annual total stands at 107, with most taking place in Europe and the United States.

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