KPMG: Global economy to grow at a relatively modest pace over the next two years

• Despite inflationary pressure easing in the first half of 2023, ongoing geopolitical tensions and domestic challenges in key markets are slowing a return to sustained growth.
• Major economies worldwide face domestic pressures, delaying any hopes of improving market conditions and a drop in inflation.
• Global growth is expected to be driven by the recovery of the Chinese economy and relatively strong growth in some emerging markets.

The global economy has been through a series of unexpected and hugely impactful disruptions over the last three years since the start of the pandemic. As inflationary pressures began to subside earlier this year, the outlook for the global economy began to improve. Unfortunately, the latest forecast from KPMG indicates that ongoing geopolitical tensions and domestic challenges in key markets are slowing any return to sustained growth.

The world’s economy is not entirely in the rut it has been in. According to the latest Global Economic Outlook report by KPMG, the nuanced, complex picture in each country, region, and territory is placing unprecedented pressure on central banks, with worries that core inflation could remain sticky and price rises could become entrenched due to the relatively tight economic environment facing several territories. 

“Growing fears for the wider international banking system could further complicate matters for central banks as they weigh financial stability risks against a plan to bring inflation back to target,” KPMG said in a statement. The outlook for the global economy took a positive turn early in the year. Inflationary pressures began to ease, with global energy prices back at levels last seen before the invasion of Ukraine. 

In addition, base effects from the rise in energy prices following the invasion are now coming off, putting further downward pressure on inflation for the rest of this year. Prices of other commodities and global food prices have also eased.

However, as the Chief Economist at KPMG, Yael Selfin, puts it, “despite the resilience of the labor market and the improving inflation conditions, the global economic growth is expected to be relatively modest over the next two years and to stay below its long-term average.”

KPMG sees major economies worldwide – most recently the UK and USA – facing their domestic pressures, delaying any hopes of improving market conditions and a drop in inflation. “The global economy has been through a series of significant shocks over the past three years – the Covid-19 pandemic and the Russia-Ukraine conflict – and saw a major expansion to government debt and a significant hike in policy interest rates by central banks,” Selfin said.

She reckons that the ramifications of some of those headwinds may not have surfaced yet, and we are still to see their full impact and how they interact. KPMG is forecasting GDP growth of 2.1% in 2023 and 2.6% in 2024, with inflation forecast at 5.3% in 2023 and 3.2% in 2024 and global unemployment levels of 5.2% in 2023 and 5.4% in 2024. 

As for the global supply chains, KPMG noticed that the pressure had eased significantly in recent months while shipping costs have dropped too. “This should help alleviate some inflationary pressures and improve supply capacity,” the report reads, adding that global trade remains relatively weak.

“We would expect it to recover this year as trade flows normalize with the reopening of the Chinese economy and a recovery in global growth, while we expect geopolitical tensions to continue to exert some pressure on trade flows over the medium term,” KPMG stated. Even consumer demand is expected to rise this year, with excess savings (money saved during the pandemic when spending on certain services was impossible) still relatively high in China and Europe.

KPMG Global Head of Clients & Markets, Regina Mayor, concluded that the actions taken over the coming months would likely play a significant role in the pace and nature of the world’s economic recovery. KPMG’s forecasts show that employment levels should remain robust, even given recent tech layoff announcements – a sign that the tight labor market faced post-pandemic shows little sign of easing. 

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