The macroeconomic outlook

17 October 2022 Blog

2023 is likely to be a mirror of this year, with the economy continuing to adjust to the energy shock but a recovery in household purchasing power reversing the trend later in the year and into 2024

I have just returned from attending the International Monetary Fund’s (IMF) annual meeting in Washington DC.  The meeting (which takes place at the same time as the World Bank’s own annual gathering) brings together central bankers, ministers, government officials, civil society representatives, business executives and academics from across the world.  It offers a very good opportunity to discuss issues affecting the global economy via a series of formal meetings, seminars and conferences (some of them within the IMF itself, some in other parts of Washington).

The discussions were dominated by Russia’s war against Ukraine, the energy crisis, the need to tackle inflation (and the importance that fiscal policy supports the efforts of central banks and not the opposite), the threat of recession, the state of labour markets and supply chains as well as the ongoing impact of China’s approach to managing the pandemic.  Risks to financial stability – and in particular the role of non-banks – were also an important theme (not least because of the concurrent developments in the UK).  In addition to all of this, the meetings also highlighted that the challenges associated with climate change are very real and are affecting many countries now – the response to this cannot wait until after all of these other problems have been addressed.  The Chair of the IMF's Monetary and Financial Committee issued this statement following the meeting which sets out what was discussed and agreed – by nearly all countries – at the meeting itself.

The world

The mood of the discussions (at least those I participated in) was relatively gloomy, perhaps not surprising when you consider the set of issues on everyone’s minds and the significant uncertainty they had created.  In its World Economic Outlook, the IMF had lowered its projections for global GDP growth next year to 2.7 per cent, with euro area growth projected to be only 0.5 per cent.

Food and energy prices globally have increased significantly, along with the risk of energy shortages over the coming winter and beyond.  In the euro area, the ECB now expects inflation to average 8.1 per cent in 2022 and 5.5 per cent in 2023.1 The relative contribution of energy prices to inflation has declined, while the contributions of non-energy industrial goods and services have increased.


The IMF’s lower growth projections are consistent with our most recent Quarterly Bulletin (QB).  We expect the uncertainty in the energy markets to slow growth at home in the coming quarters.  Since our last forecasts in July, developments in the supply of gas have led markets to expect significantly higher pricing over the coming year.  We continue to see inflation peaking this year but we also expect a more prolonged period of high inflation in 2023.  Employment remains robust: demand for labour remains high, with three people seeking work for each vacancy available (compared to directly before the pandemic, this number has halved).

Overall, 2022 can be seen as a year of two halves, with strong growth in the first half slowing considerably in the second. 2023 is likely to be a mirror of this year, with the economy continuing to adjust to the energy shock but a recovery in household purchasing power reversing the trend later in the year and into 2024.  We do not see a recession, although there are upside risks to the inflation forecast and downside risks to the growth forecast.  Much of the slowdown in growth in the second half of this year (and early next year) is contingent on energy prices stabilising, alongside a smooth transition to more sustainable energy supply.  But a more intense and protracted war in Ukraine or a further deterioration in energy or food supplies would result in lower growth and higher inflation than set out in our baseline forecast.

The costs of this negative external shock to the economy are ultimately ones that have to be met out of collective resources domestically and will require an unavoidable adjustment for households, businesses and the economy as a whole.  Policy actions can mitigate some of the cost and distribute it across the economy and society.  The importance of this should not be underestimated given the evidence on the differential impact across households, with lower income, rural and older households’ experiencing a sharper shock given their relatively higher spend on energy.2 As was set out in the QB, around 15 per cent (or 180,000) of households are particularly vulnerable to the current inflationary environment as a result of relatively lower incomes, larger expenditure on essentials of food and energy, and limited savings buffers.3  Targeted (and temporary) fiscal measures to ‘bridge the gap’ for such households are appropriate and warranted as the economy overall adjusts through the current supply-side shock.

And of course, in addressing the immediate challenges, we also need to plan for and deal with the longer-term challenges that remain.  Ideally, near-term actions should be consistent with achieving longer-term objectives.  Continuing to build our economic resilience to the major transitions our economies are undergoing should remain a priority.

Responding to Inflation

Increasing price pressures across the world are putting a squeeze on real incomes and undermining macroeconomic stability.  Monetary tightening in developed countries, along with stronger currencies in some cases, creates additional challenges for many developing economies already struggling with the challenges of food and energy price inflation and dealing with the pandemic.  The consensus in the discussions last week was that central banks should take the necessary action to restore price stability while fiscal policy should protect the most vulnerable through targeted and temporary near-term support (and avoiding fuelling inflation).  We also needed to ensure the active use of macroprudential policies to guard against financial sector systemic risks.

The challenge of tightening monetary policy against the backdrop of numerous global uncertainties was evident to see during the Annual Meetings.  Nevertheless, central banks are committed to restoring price stability and to take the necessary monetary policy action to deliver that.  All of us will need to keep a steady hand as we face into choppy economic conditions in the short and medium term.

The ECB’s Governing Council is committed to continuing its normalisation of monetary policy and, having raised its key interest rates by 75 basis points last month (and by 125 basis points over the last two most recent policy meetings), we expect to raise rates further over the next several meetings.  We will regularly re-evaluate our policy path in light of incoming information and the evolving inflation outlook.  Our decisions remain data-dependent and follow a meeting-by-meeting approach as we continue the transition from the prevailing highly accommodative level of policy rates towards levels that will support a timely return of inflation to our two per cent medium-term target.4


The global economy faces significant challenges.  Monetary and fiscal policy need to be pointing in the same direction to deal with both the pressures we face now but also the significant economic transitions that our economies have embarked on.

Gabriel Makhlouf

1  ECB Monetary Policy Press Release - 08 September 2022

2 Economic Letter - Household characteristics, Irish inflation and the cost of living

3 Quarterly Bulletin Signed Article - Household Economic Resilience

4 President Lagarde Speech 20 September 2022

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