ASIA

AUSTRALIA

In Australia, economic and business conditions continue to show a robust response to market conditions nationally and internationally. The items high on the agenda are climate change driving organisations to introduce response programs, very low unemployment resulting in labour and talent shortages, executive caution with a wariness of how events and conditions may impact business, increasing inflation and interest rates impacting pricing , regional stability in defence and trade, and energy and consumption cost increases. There is resilience of households to high inflation and rising interest rates, against a backdrop of falling housing prices. Household balance sheets overall remain well placed to manage these pressures, supported by strong labour market conditions and the large saving and equity buffers accumulated during the pandemic. Banks remain very well capitalised to continue to support household and business demand for credit. Mineral and resource exports, such as coal, gas, and iron ore, are strengthening the Government's balance sheet. 

We have been fortunate to be less affected than others by the global shocks but nevertheless, we have been significantly affected. In response to the sharp recovery from the pandemic and inflation, monetary policy is rapidly tightening in Australia. Reflecting this tightening, economic growth is forecasted to slow from 3¼ per cent in 2022–23, to 1½ per cent in 2023–24. Strong consumption growth of 6½ per cent in 2022–23 is expected to be temporary, driven primarily by the ongoing rebound in services spending and international travel as the impacts of pandemic activity restrictions continue to wane. Declining household wealth arising from ongoing expected falls in housing prices will further contribute to the slowing of consumption growth.

The current very tight labour market conditions may gradually ease as economic activity slows. Employment growth is forecast to slow to ¾ per cent in 2023–24 and the unemployment rate is expected to increase to 4.5%, currently it is at 3.4%.

Inflation is expected to peak early 2023 before easing gradually by middle of 2024. Electricity and gas prices are expected to directly contribute to inflation with wholesale electricity prices nearly trebling compared to last year prior to Russia’s invasion of Ukraine.

At the same time, domestic weather events and supply constraints combined with strong demand in residential construction and consumer goods, are contributing further to generalised price growth.

Sources include Australian Bureau of Statistics– December 2022, Opening statement to the Economics Legislation Committee– December 2022, Quarterly Statement by the Council of Financial Regulators – December 2022

CHINA

The improvement in China's overall economy could be expected in 2023.

According to the National Bureau of Statistics, the country GDP growth in the fourth quarter in 2022 was at 2.9% year-on-year and a yearly growth at 3.0%, both of which are better than market expectation,

It is predicted that recovery will become the main keynote of the new year, and economic growth will hopefully converge to a reasonable growth range around 4.8% – 5%. New energy vehicles, smart phones and green smart home appliances will drive the internal power for growth, the fundamental way to restore and expand consumption affected by the pandemic.

Stable currency for USD-CNY is the main theme in the coming year

Over the short term, growth and policy enthusiasm are likely to drive USD-CNY lower; however, the interest rate disadvantages could lift USD-CNY. It is predicted that the range of 6.80-7.15 is the new central range for USD-CNY.

The housing market is to be rescued with great efforts

The property market will be a key sector to be rescued with great efforts. Proper policy support has been released. It is expected that a more orderly adjustment, not only on demand-supply dynamics, but also on developers’ credit issues has been done. The deleveraging in the property market should be relatively mild, and investors will also find a new and more pragmatic approach to pricing in property-related assets.

Dispelling concerns for global investors could be possibly erased

It is one great sign for global investors that Chinese policymakers have made a clear statement on equal treatment of private enterprises and SOEs. With the normalization of regulation framework, a platform economy will engage global competition. Chinas gradual withdrawal of Covid-related restrictions also means that the economy will be normalizing in the next few months, which will remove one of the biggest uncertainties in the long term. Both services and manufacturing sectors will benefit from the economic recovery.

INDIA

The year 2022 has been marred by a series of challenging phenomena including inflation, high interest rates, absurd corporate valuations and geopolitical uncertainties led by the fallout of the Russia-Ukraine war, headwinds in China, both on account of the country’s zero covid-tolerance policy and political tension with Taiwan—all of which have led to tighter financial conditions and weakened economic activity across the world. India too hasn’t remained insulated from these macro developments and the country is likely to be impacted further in 2023, albeit to a lesser extent.

India’s greatest strength lies in its domestic consumption, amply supported by a young and large working population with disposable incomes and boosting business confidence. The opportunities for growth and investment are ample at present and likely to multiply every passing year.

Stating that India’s level of economic activity is closer to the pre-pandemic path, global brokerage firm Credit Suisse expects the Gross Domestic Product (GDP) growth of the country going ahead will be stronger than the current consensus forecast of 6 per cent in the financial year 2023-24 (FY24). The brokerage firm reasons it out in its statement on economic growth as ‘many broad-based high-frequency indicators, including consumption of energy, point to growth being stronger than reported.

According to experts, businesses will emphasize on creating work-life integration cultures, nurturing specialty talent, improving skills, and offering flexible work schedules as short-term opportunities increase. Companies are going to be willing to pay more for relevant talents than for legacy capabilities in 2023, according to these trends:

• The festive-season momentum of increased hiring in retail, e-commerce, and BFSI sectors will likely spill over into 2023. Hiring in the Indian IT sector is likely to rise in the first quarter of 2023 as seven out of 10 companies plan to increase their headcount in the period.

• A similar trend is expected in the services-oriented industries of hospitality, and airline sectors as people continue to travel more to make up for the Covid-time isolation.

• In addition, key sectors that have indicated their intent to hire are e-commerce, telecommunications, educational services, financial services, retail and logistics. There will also be increased demand for developers of solutions to combat climate change.

• Due to the increasing popularity of virtual job fairs, interviews, tests, and recruitment automation, recruiting will also be done remotely.

Rupee Market 2023

The Indian rupee is likely to witness heightened volatility in the first six months of the next calendar year on account of global headwinds, experts said. The risks to the rupee include a potential recession and resurgence of COVID. However, the second half of 2023 may see appreciation of the rupee as interest rates may peak and inflation ease.

International Trade 2023

India's exports may have touched an all-time high of USD 422 billion in 2021-22 but recession in key western markets and geo-political crisis due to the Russia-Ukraine war are expected to impact the growth of the country's outbound shipments in 2023. All the global trade promoting factors like political stability, movement of goods, adequate availability of containers and shipping lines, demand, stable currency and smooth banking systems are in disarray.

Taking note of worsening geopolitical situation, the World Trade Organization (WTO) has projected that the global trade would grow by only one per cent in 2023.

According to experts, amid these developments it would be difficult for India to insulate itself from the dark clouds. However, they added that India has managed the growth rate in exports so far and healthy growth in services exports too would help the country's overall outbound shipments in 2023.

NEW ZEALAND

Projections for a slowdown in economic growth have only increased due to the continued rise in borrowing costs. With inflation running red hot, the Reserve Bank of New Zealand (RBNZ) has been hiking the Official Cash Rate (OCR) at a rapid pace. The OCR has already risen by 400 basis points since October of last year. Those large increases in the OCR have seen a marked downturn in the housing market.

But as many banks now expect the official cash rate to rise to 5.25% early next year – potentially sending one-year mortgage rates as high as 7.5% – an end to the “cost of living crisis” looks some way off for borrowers at least. Interest rate rises meant 2022 was a year that most investors will want to forget.

New Zealander’s hold a large amount of their wealth in owner occupied or investor housing, and the fall in prices now in train has taken a sizeable bite out of many households’ net worth. But despite that, overall household spending has continued to trend higher a year after the interest rate tightening cycle began. Crucially, there is no sign that domestic inflation pressures are cooling. In fact, measures of core inflation have continued to push higher. A key reason for that resilience in demand is that around 90% of New Zealand mortgages are actually on fixed rates. Many borrowers locked in very low interest rates in the early stages of the pandemic. That has shielded them – and their spending power – from interest rate increases to date. However, the situation for many New Zealand borrowers is going to become much tougher. Around half of all mortgages will come up for repricing over the coming year, and borrowers will face refixing at rates that are significantly higher than those they are currently on.

House prices started to fall at the end of 2021 in response to the rise in fixed term mortgage rates, and they’re now down almost 14% from their peak on average. That still only takes them back to where they were in early 2021, which just goes to show how massive the run-up in prices was in the first place.

Despite this hit to household wealth, consumer spending has been fairly resilient to date. Spending in dollar terms has continued to grow at a solid clip, although increasingly that has reflected rising prices rather than volumes. What has helped is that household incomes have been growing strongly too. At the start of this year, wage growth was the shoe that had yet to drop in this cycle, prompting questions around whether something had changed in the structure of the labour market. That didn’t last long though – wage growth has accelerated sharply in the last few quarters, on some measures reaching its fastest pace in decades. Average wages are now rising fast enough to keep pace with consumer price inflation.

After a year of ‘records’ both good and bad, next year will feel like a hangover year for the economy, if economists’ forecasts are on the money.

The big unknowns remain just how quickly inflation will come down, whether interest rates may already have put the country on a path to recession and of course the outcome, if there is one of Russia’s war on Ukraine.

Most forecasters believe the economy will have grown by somewhere between 2% and 3% this year (2022), after the strong 5.7% bounce-back from Covid lockdowns last year.

Although unremarkable in a more normal year, that would be a pretty strong growth rate historically once translated into “GDP per capita”, given the lack of immigration and slow population growth over the period.

But growth is expected to slow further next year (2023), probably to a snail’s pace, as the impact of interest rate-rises and predicted recessions in Europe and possibly the United States kick in.

BNZ, for example, is forecasting 2.4% growth this year and for that to slow to just 1% next year as aggressive interest rate hikes and a decline in global growth hits home.

Infometrics forecasts that the price for getting inflation back under control in New Zealand and overseas will be two years of “stunted growth” that will mean a couple of uncomfortable years for households.

Official unemployment has hovered between 3.2% and 3.3% so far this year (2022).

That is the lowest since Stats NZ began collating comparable statistics in 1986 and it’s almost certainly the lowest unemployment has been since at least the late 1970s. No-one is expecting that to last, though the current forecasts for the jobs market aren’t dire.

The RBNZ was assuming in August that unemployment would climb back above 4% next year (2023) and ANZ has it at 4.5% by the end of 2023. BNZ has been forecasting a more modest rise, with unemployment still sitting at only 3.7% at the end of next year.

Inflation has been sitting at rates not seen for more than 30 years and was barely budged at 7.2% at the end of September.

Recent falls in the price of oil and other commodities bode better for inflation and BNZ sees it falling away quite sharply to 3% by the end of next year.

As of early November, the New Zealand Stock Exchange (NZX) was down about 14% on the year and the US S&P Index was down by almost 21%. The retreat extended to bond markets, with investors in New Zealand bonds experiencing average losses of 5% and investors in global bonds about double of that, based on the performance of exchange-trade funds quoted on the NZX between January and November.

To quote one economist – “We are looking down the barrel of a recession in some parts of the world and New Zealand will not be immune from that. We see the economy going back into its shell more in 2023.”

Sources include – Stuff News Digital Platform and Westpac economic Update

AMERICAS

BRAZIL

Brazilian economy has attained major improvements in 2022 and the trend is forecasted to continue in 2023, away from the severe 3-year recession and impact of Covid 19.

Brazilian Inflation in 2022 reached 5.79%, almost half of 10.06% in 2021, and slightly below the 5.00% target for the year, says IBGE, the Governmental Brazilian Institute for Geography and Statistics. IPCA - the official Ample Consumer Price Index was severely affected by the 11% hike in food & beverage inflation.

In 2022 , Brazilian GDP achieved a 3.1% growth, according to IPEA, the official Institute for Applied Economic Research, from a revised study of December 15, 2022, versus 2.9% of previous forecast. In terms of GDP worldwide growth, Brazil ranked 54th from a 57th position in 2021.

The 2022 Brazilian economy ranked 9th worldwide and returned to the top 10 largest economies group. According to IBGE, the Brazilian economy reached 2.544 trillion Brazilian reais. Investment growth forecasted, as a % of GDP, in 2022, will slightly exceed 20%, according to the former Ministry of Economy. This is the largest rate in 8 years. Ideal investment rate, as a way to increase Brazil’s potential growth would have to run between 22% and 25% of GDP, say the Economic Authorities.

Continuous improvement in the unemployment rates

Important recovery was achieved in the unemployment rates, creation of unskilled and semiskilled jobs improved the Brazilian general labour market in 2022.

According to IBGE/PNAD country overall research study ended in Q3 2022, unemployment rate fell 3.8% down to 8.3%, as compared to Q3 2021. This is the lowest rate, since 2014, says IBGE. Current total employed population of Brazil tops 99.7 million.

The number of “desalentados”/hopeless, discouraged workers (those who constantly looked for jobs over 2 years and have given up doing it) fell from 5.1 million in 2021 to 4.2 million in 2022.

“PROGRAMA AUXÍLIO BRASIL”

This modest, but very meaningful social program intended to increase income distribution to the very poor continued to be in place during 2022 and has increased in January 2023 as from R$ 400,00, or US$ 72.00/month, to R$ 600,00, or US$ 111.00/month, as a result of both candidates’ promises disputing the presidency of Brazil in the very polarized election of October 2022.

EUROPE

BELGIUM

Economic growth in Belgium is expected to reach 2.8% in 2022, 0.2% in 2023 and 1.5% in 2024. Following the strong increases in energy prices, high inflation, which is forecasted to reach 10.4% in 2022, 6.2% in 2023 and 3.3% in 2024, is projected to temper the growth of private consumption. The government deficit is projected at 5.2% of GDP in 2022, reflecting the budgetary response to high energy prices. In 2023, the worsening of macroeconomic conditions is projected to widen the budget deficit to 5.8%.

After a strong start to 2022, activity weakens

Economic growth is set to reach 2.8% in 2022, as the easing of COVID-19 related restrictions allowed for further expansion of activity in the first half of the year.

High inflation and the decrease in consumer confidence are projected to curb the expansion of household consumption in the second part of the year. Quarterly GDP growth is estimated at -0.1% in 2022-Q3 and is expected to contract further in 2022-Q4. However, further automatic indexations of wages and social benefits are set to support the purchasing power of households moving forward. As indexation kicks in with a lag, this effect is expected to gain strength in 2023 and accelerate in 2024, when inflation is forecast to substantially slow down.

Uncertainty, higher cost pressures from input prices and wages are also expected to weigh on business investment. At the same time, the RRF is forecasted to support gross fixed capital formation, in a context of increased needs for the energy transition. Consequently, after a contraction in 2022, investment is projected to recover slowly in 2023 before rebounding more dynamically in 2024.

After a strong performance of net exports in 2021, a less favourable external environment is set to weigh on exports in 2022 and 2023. The contribution of net exports to GDP growth is projected to be negative over the forecast horizon. All in all, real GDP growth is expected to slow down to 0.2% in 2023 and rebound to 1.5% in 2024.

Slow-down in the labour market

The good performance of employment in 2021 has put the Belgian labour market on a strong footing for 2022. However, rising uncertainty and the downturn in economic activity is projected to moderate the performance of the labour market in the second part of 2022 and in 2023. Employment growth is forecasted to reach 1.8% in 2022 and 0.3% in 2023, before regaining some strength in 2024, consistent with economic growth. The unemployment rate is expected to increase from 5.8% in 2022 to 6.4% in 2023 before a small decline to 6.3% in 2024.

Inflation on the rise

Inflation is forecasted to reach an exceptionally high level of 10.4% in 2022. The sharp increases of wholesale gas and electricity prices have transmitted quickly to retail prices, which are expected to remain high next year. The pass-through of increased costs to core inflation components, including via higher wages, is projected to keep inflation elevated over the forecast horizon. As such, headline inflation is set to reach 6.2% in 2023, before slowing down to 3.3% in 2024 on the back of the gradual fall of energy prices.

The energy crisis and the economic slowdown add burden on public finances

While pandemic-related government measures weighed considerably less on public finances in 2022 than in 2021, the budgetary cost of measures to mitigate the impact of high energy prices keeps the projected budget deficit at high levels in 2022, at 5.2 % of GDP compared to 5.6% of GDP in 2021. The higher expenditure from the automatic indexation of public sector wages and social benefits to rising consumer prices is projected to be only partly offset by the impact of higher wages and purchasing power on the revenue side.

In 2023, the government deficit is forecasted to increase further to 5.8 %, reflecting the deteriorating macroeconomic landscape, while the cost of energy-related measures is assumed to decline on the back of the announced phasing-out of most of them in the first quarter of 2023. At the same time, the automatic indexation of public sector wages and social benefits, a rising interest rate burden, as well as lower corporate tax revenue due to lower profit margins, are also expected to have a negative impact on the government budget balance.

In 2024, the government balance is projected to slightly narrow, to 5.1% of GDP as crisis measures are assumed to be withdrawn and the economic outlook is expected to improve. The still high government deficit in 2024 also reflects the growth in non-crisis current expenditure, which is notably due to rising ageing costs and to the budgetary impact of recently adopted permanent measures not offset by compensating measures.

Government debt is forecasted to decrease from 109% of GDP in 2021 to 106% in 2022 (due to the high GDP deflator), before increasing to 108% of GDP in 2023 and to 109% 2024, driven by high budget deficits.

Sources include: National Bank of Belgium, European Commission, Eurostat 

FRANCE

In France, contrasting economic signals point to an industrial decline and therefore a moderate decline in economic activity at the end of 2022, before a gradual rebound, especially in spring 2023.

French GDP could decline slightly in the fourth quarter of 2022 (-0.2% expected, after +0.2 in the previous quarter), driven by declining industrial production and sluggish activity in services. Household consumption is expected to contract sharply, due in particular to a sharp decline in energy consumption and a decline in spending on accommodation and food services.

After a strong recovery in vehicle purchases in the summer, investment is expected to slow. Foreign trade is expected to underpin activity at the end of the year, with large deliveries of aircraft and ships in particular.

The beginning of 2023 will continue to be marked by rising of electricity and gas prices, for both businesses and households. Activity should nevertheless rebound very slightly in the first quarter (+0.1% forecast), thanks to the expected rebound in coking and refining after the autumn strikes, and the scheduled restart of several nuclear reactors currently undergoing maintenance. The rebound is expected to be more pronounced in the second quarter (+0.3% forecast) with an acceleration of activity in services.

Overall, annual growth would reach +2.5% in 2022 (after +6.8% in 2021). For 2023, the mid-year GDP growth rate (i.e., the growth that would be obtained assuming that activity in the third and fourth quarters remained at the same level as that forecast for the second quarter) would be positive but modest (+0.4%).

This forecast scenario assumes that there will be no electricity load shedding this winter, and that the availability of the French nuclear fleet will gradually rebound. In addition to other uncertainties that could affect economic activity (geopolitical developments in Eastern Europe, health situation in China, effectiveness of budgetary support, impact of the current monetary tightening, etc.), there is also a technical uncertainty related to the restarting of French nuclear reactors: their lack of availability would have taken away approximately 0.4 points of GDP in 2022.

Inflation (as measured by the consumer price index) is expected to rise to about 7% this winter, then fall back in the spring due to a "base effect”.

The evolution of inflation over the next few months depends, among other things, on the evolution of energy price controls and fluctuations in oil prices. The planned increase in regulated gas and electricity tariffs, as well as the end of the discount at the pump, would contribute to raising overall inflation, which would reach +7% over one year at the beginning of 2023. Year-on-year food price inflation would reach about 13%. Starting in the spring, overall inflation could nevertheless fall back due to a "base effect" (+5.5% expected in June), with prices continuing to rise month by month but less sharply than a year earlier.

Since 2021, quarter after quarter, employment has been surprisingly strong, more so than activity. The good performance of the employment climate calculated on the basis of business surveys reflects this dynamism. In the third quarter of 2022, salaried employment was 3.6% above its level at the end of 2019, while GDP exceeded its level by 1.1%.

Under the activity scenario, employment would slow in the coming quarters (+0.2% expected in the fourth quarter of 2022, followed by +0.1% in both the first and second quarters of 2023). Over the forecast horizon, the unemployment rate would remain stable (at 7.3% of the labour force) as the labour force and employment grow at the same pace.

Sources include: INSEE – Institut Nationale de la Statistique et des Etudes Economiques.

GERMANY

Business and economic outlook for 2023 in Germany are again influenced by global challenges from politics and crises. Significant influencing parameters originate from the country’s ability and willingness to change and from its financial reserves and strengths.

The expectation in 2023 is again higher inflation than in the pre pandemic years and a light recession of about 0.5% GDP decline which could result in a stagflation.

War in Ukraine and energy gap fears, particularly gas and electricity, will not just cause problems in some less resilient European countries but will also be new challenges in Germany. Political risks in some developing countries with an effect on trade, geopolitical effects from USA and China, externally and internally, protectionism, may put pressure on global trade also. The world will experience supply chain disruptions again. This effects an export-oriented country like Germany. Large investments in innovations and transitions shall lower the threats.

Capital markets may experience prize corrections repeatedly in some asset classes. New selective answers are required and shall deliver positive effects but on a longer term. Climate issues shall be new chances rather than threats for business overall. In sectors that experienced growth for longer time new leaders maybe required, capable of not only managing an economical sunshine but also navigating through turbulent times. Liquidity of most stake holders including government in Germany shall support getting away economically once more.

LUXEMBOURG

Real GDP growth is projected to slow down to growth rates of 1.5% in 2022, 1% in 2023 and 2.4% in 2024, affected by weaker domestic and external demand, and high uncertainty surrounding consumers and investors’ behaviour. Headline inflation is forecasted to increase to 8.4% this year, before decelerating to 3.8% in 2023 and further to 3.1% in 2024. The new measures to mitigate the impact of high energy prices and the economic slowdown will weigh on the general government balance, especially in 2023. Resulting deficits are projected to increase the general government debt-to-GDP ratio, although still at a low level.

Growth set to slow down in 2022 and 2023

Real GDP increased by 2.2% in the first half of the year, compared to the same time period in 2021. Nevertheless, growth slowed sharply from 0.7% q-o-q in 2022-Q1 to -0.5% in 2022-Q2, driven by a decline in investment, in particular in construction, and a decrease in private consumption. In 2022 as a whole, GDP is expected to grow at 1.5% y-o-y.

Slowing demand in Luxembourg’s main trading partners and weakening financial outlook are forecasted to weigh on the GDP growth in 2023, estimated to slow down to 1%. This is also reflected in the lower consumer and business confidence. In particular, the construction sector is set to slow down. Nevertheless, investment and private consumption are forecasted to grow at a moderate level, despite rising interest rates expected to weigh on borrowing capacity and demand for mortgages in the country. Private consumption is projected to remain resilient, supported by additional measures introduced by the government in order to tackle high inflation and to maintain households’ purchasing power (‘Solidaritéitspak 2.0’). These measures include the stabilization of electricity prices, limitation of the increase in gas prices to 15%, a reduction of heating oil prices and a 1%-VAT cut until the end of 2023.

Positive prospects for 2024

Albeit subject to high uncertainty, better prospects are seen for 2024, with an estimated GDP growth rate of 2.4%. The economy is expected to return to its pre-pandemic trend, supported by growing investments and domestic and external demand.

Labour market set to remain resilient

The labour market is expected to remain resilient, although it is forecasted to weaken slightly because of the economic slowdown. Unemployment is set to reach 4.7% this year, before increasing to 5.1% in 2023. The rise in unemployment is projected to remain subdued due to the high job vacancy rate and positive employment prospects in some sectors such as construction. With growth picking up, the unemployment rate is expected to decrease to 4.9% in 2024.

Fiscal support to lower inflation, however core inflation to edge up

Headline inflation is forecasted to increase to 8.4% in 2022, mainly driven by energy prices. Nevertheless, energy price inflation is expected to moderate from 2022-Q4 until end 2023, easing inflationary pressures, due to the introduction of the ‘Solidaritéitspak 2.0’. Overall, HICP is set to reach 3.8% in 2023, before decreasing to 3.1% in 2024. In turn, core inflation is forecast to rise from 4.7% in 2022 to 5% in 2023, reflecting higher wages and non-industrial goods’ prices. Wage increases are driven by two wage indexations expected to take place in 2023, including the one postponed from July 2022.

Support measures drive the decline in the general Government balance

In 2022, the general government balance is expected to record a small deficit of 0.1% following the surplus of 0.8% of GDP in 2021. The government balance is projected to decrease as a result of lower GDP growth and the three government packages to support households and corporates facing higher energy prices. Revenue growth is expected to slow down from the high rate in 2021 but continues to benefit from the strong performance of taxes on products and imports, personal income tax and social contributions. The compensation of employees, social transfers, and subsidies are pushing up expenditure growth in 2022. A main driver of this are the measures to mitigate the economic and social impact of high energy prices amounting to 1.2% of GDP. The high inflation impacts expenditure and revenue mainly via the wage indexation that pushes up social contributions, income tax, compensation of employees and social benefits. In addition, VAT revenues benefit from the increase in prices.

In 2023, the deficit is set to increase strongly to 1.7% of GDP. This is mainly caused by the additional government support measures of the ‘Solidaritéitspak 2.0’ mitigating the impact of high energy prices for households and corporates, but also due to the slowdown in economic activity and the uncertain prospects for financial markets. Revenue is expected to grow at a more moderate pace, because of the 1%-VAT reduction, which is part of the household income support measures, and because corporate income tax is projected to be impacted by the economic and financial environment. Expenditure is expected to increase, mainly driven by the energy measures (with an estimated budgetary impact of 1.0% of GDP( )), and the compensation of public employees due to the two wage indexations expected for 2023. In addition, public investment is planned to remain above 4% of GDP over the forecast horizon, supporting the green and digital transition, public infrastructure, and housing.

The general government deficits are forecasted to result in an upward trend of the debt-to-GDP ratio. The positive nominal GDP growth is expected to be offset by new debt issued to finance the deficit of the central government, as the surplus of the social security sector cannot be used for this purpose. Therefore, the debt-to-GDP ratio is projected to increase from 24.5% in 2021 to 26.3% in 2024.

Sources include National Bank of Luxembourg, European Commission, Eurostat

THE NETHERLANDS

The Dutch economy grew strongly in the first half of 2022 on the back of solid export and investment growth. A decrease in households’ real disposable income, tightening financial conditions and the uncertainty caused by Russia’s invasion of Ukraine are, however, expected to lead to a modest contraction of economic activity in the second half of the year. Headwinds are expected to persist in both 2023 and 2024 and annual growth is forecasted to slow down to 0.6% and 1.3% respectively. For 2023, the authorities have announced a package of measures to mitigate the impact of high energy prices, which is expected to support domestic demand and prevent a more substantial slowdown in GDP growth. The measures taken by the government are forecasted to increase the budget deficit to 4.0% of GDP in 2023. With the expiry of the support measures at end of 2023, the deficit is set to decrease to 3.1% of GDP in 2024.

A strong economy at a turning point

Following strong annual GDP growth in 2021, the Dutch economy continued to grow rapidly in the first half of the year, driven by substantial investment growth and a large contribution from net trade. However, the surging inflation, in part caused by Russia’s war of aggression against Ukraine, is starting to weigh on the Dutch economy. With price increases far exceeding wage growth, households are seeing their real disposable income decrease, which is forecasted to lead to a small contraction in consumer spending in the second half of 2022. At the same time, tightening financial conditions, labour shortages and the increased uncertainty about the economic outlook are expected to lead to a decline in investment activity. The Dutch economy is forecast to stagnate in the third quarter and to contract modestly in the fourth quarter. Overall, annual GDP growth in 2022 is forecasted at 4.6%.

Economic conditions in 2023 remain challenging

With an expected weak external environment, further tightening of financial conditions and high international energy prices, economic conditions in 2023 would remain challenging. As a result, both export and business investment growth are set to be subdued throughout 2023. To alleviate the impact of high inflation on households’ budgets, the authorities have announced a set of support measures, which are expected to prevent a further slowdown in private consumption growth. Government consumption and investment are projected to grow robustly and contribute substantially to the forecast annual GDP growth of 0.6%.

Real disposable income growth is expected to remain limited in 2024 as the support measures put in place by the authorities are set to expire by end-2023. Investment growth is forecasted to pick up slightly and net trade to contribute positively to growth. Uncertainty is, however, expected to remain high and GDP is forecasted to grow moderately in 2024 at 1.3%.

A tight labour market

The Dutch labour market remains tight, though unemployment has been gradually picking up in recent months. With global demand weakening, the unemployment rate is forecasted to pick up further, from 3.7% in 2022 to 4.3% in 2023 and 4.3% in 2024. Overall, the forecast for unemployment rates in 2023 and 2024 remain low in historical perspective. Nominal wage growth is on a clear upward trend, reflecting both the tight labour market and the high inflation, and is expected to increase to 4.5% in 2023.

Surging inflation

The increased uncertainty regarding the supply of gas has led to surging energy prices in recent months. In addition, price pressures have broadened, with core inflation continuing to pick up. As result of this, HICP inflation reached 17.1% in September and 16.8% in October, among the highest in the euro area. Energy prices are expected to remain elevated in the remainder of 2022 and 2023 before declining in 2024. However, the Dutch authorities have announced a price cap on electricity and gas prices, which will apply until end-2023. The price cap is forecasted to substantially lower annual inflation in 2023 to 4.2%, down from 11.6% in 2022. Core inflation is set to peak in the beginning of 2023 and gradually decline thereafter. Headline annual inflation is projected to decrease to 3.9% in 2024, with the planned expiry of the price cap on energy preventing a sharper decline in headline inflation.

Support measures drive up deficit in 2023

In 2022, the deficit is forecasted to decrease to 1.1% of GDP, driven by higher revenues from income taxes and Dutch gas fields, while spending on COVID-19 related measures is projected to decrease.

For 2023, the government announced a package of both temporary and structural support measures to mitigate the impact of high energy prices on both households and companies. This package includes a price cap on electricity and gas, the extension of a reduction in the excise duty on fuel and the increase of an energy compensation benefit scheme for lower-income households until end 2023. Besides these temporary interventions, different structural measures, such as the rise of the minimum wage by 10% and a decrease in taxes on labor income are planned to enter into effect in 2023. Based on the Government’s estimates, the fiscal cost of the package is expected to be between EUR 20 billion and EUR 30 billion (some 2 - 3% of GDP), with the cost of the price cap depending on how energy prices develop.

Partly as a result of this large expansionary package, the Government deficit is forecasted to increase to 4.0% in 2023. As the temporary measures expire at the end of 2023, the deficit is projected to drop slightly to 3.1% in 2024.

Government debt is projected to increase from 50.3% of GDP in 2022 to 52.4% in 2023 and 53.2% in 2024.

Sources include: National Bank of The Netherlands, European Commission, Eurostat

NORWAY

The Norwegian economy has recovered rapidly following the pandemic. The labour market is now very tight, wage growth appears to be on the rise and inflation has reached its highest levels in decades. Tighter economic policy is now necessary.

In the National Budget the government projects consumer price inflation at 4.8 per cent in 2022 and 2.8 per cent in 2023. Both forecasts are higher than projected in the Revised National Budget from May. Economic growth appears to be decelerating faster than previously anticipated, both in Norway and abroad. The growth forecast for the non-oil economy (GDP for mainland Norway) is 2.9% in 2022, 1.7% in 2023 and 2.0% in 2024. This is somewhat lower than was projected in the Revised National Budget.

Unemployment is nevertheless expected to remain low. It is likely that employers will continue to experience problems in recruiting within several professions. Registered unemployment is projected to be 1.7% of the labour force in both 2022 and 2023, a decrease from 3.1% in 2021.

The growth in house prices has slowed in recent months, after being high for several years. Statistics Norway’s house price index shows that house prices in the second quarter of 2022 this year were 19.5% higher than the corresponding quarter two years earlier.

Real Estate Norway’s monthly house price index shows weak growth throughout the summer but that the growth rate in August was at the same level as in 2021. The forecasts estimate that house prices will increase by 5.7% in 2022, and then fall by 2.5% in both 2023 and 2024.

Sources includes National Statistical Institute of Norway and Norwegian Government.

SPAIN

Economic slowdown

The year 2023 will bring a significant slowdown in the growth rate of the Spanish economy - which will increase by 1.1% - and a mild improvement in the evolution of prices, which could be around 4% in June next. This is the opinion of experts and executives of the Economic and Business Consensus of PwC, corresponding to the fourth quarter of the year.

In this way, Spain will not recover in 2023 the gross domestic product it had before the pandemic. As a result, the estimates of these experts on the average growth of activity are slightly lowered for 2022 - from 4% to 3.9% - and significantly for 2023 - from 3% to 1.1% -.

The slowdown in economic activity will be mainly due to the fall in demand from families, both consumption and, especially, the purchase of housing. In fact, they anticipate that consumption will decrease in the coming months, and that the same will happen with housing purchases, probably due to the increase in interest rates and the increase in mortgages.

As for companies in the coming months, a decrease in productive investment and job creation is expected. However, their better relative situation compared to that of families is based on the evolution of exports that will continue stable, at least, until mid-2023. A situation that is being benefited by the depreciation of the euro against the dollar.

Less tensions in prices

Inflationary tensions are beginning to ease. An improvement in the inflation forecast for 2023 is estimated, which places the growth of prices in June 2023 at 4%.

However, most of the experts, executives, and businesspeople interviewed consider that it is still too soon to know if the increase in inflation in our country will acquire a more structural character. And when asked about which are the factors that most concern them for the future evolution of the CPI, they highlight, first, the increase in energy prices and, second, the increase in labour costs.

Being aware that Spain is still lagging behind in the recovery of GDP, our economy could show greater resilience than the Eurozone due to a number of factors. Among them are the less impact of the energy shock compared to other European countries, a less tense real estate market and the resilience of the labour market.

SWEDEN

The Swedish economy is set to contract mildly in 2023 as high inflation, rising household debt service and uncertainty weigh on household consumption and investment. Wage pressures are projected to remain contained, in line with the rise in unemployment. This, along with falling commodity and freight prices and easing supply bottlenecks is expected to contribute to the decrease of inflation over the forecast horizon, supporting a gradual recovery as of the second half of 2023. The general government balance is projected to show a slight surplus.

In view of labour shortages in a wide range of sectors, the labour market is set to remain relatively robust in the face of the projected slowdown. Nevertheless, the unemployment rate is set to rise to just below 8% in 2024 in a delayed response to the expected slowdown.

UK

The UK economy recovered from the COVID-19 shock thanks to emergency support measures protecting jobs and incomes and a rapid vaccine rollout but is slowing amid persisting supply shortages and rising inflation. Fiscal policy has to balance gradual tightening with providing well-targeted temporary support to households who are vulnerable to rising costs of living, supporting growth and addressing significant investment needs.

Accelerating progress towards net zero is fundamental to enhance energy security. The United Kingdom is among world leaders in reducing domestic greenhouse gas emissions, has a strong institutional framework and a broad political consensus supporting the target to reduce net emissions to zero by 2050.

The UK economy will shrink by 1.3% in 2023, amidst a relatively shallow but protracted recession. This will be followed by a partial recovery in 2024, which could see GDP rise by 0.2%.

Elevated inflation and rising interest rates will continue to put pressure on households’ living standards. By the end of Q3 2022 household consumption has already fallen by 0.6% on a per capita basis and is projected to fall by a further 3.4% by mid-2024. While a fall in savings or higher borrowing could support consumption to some degree, persistently low levels of consumer confidence could lead to higher levels of precautionary savings, the report tells.

Companies’ margins and investment are negatively affected by rising interest rates and ongoing geopolitical uncertainties, slowing global growth over the medium term. Expect overall investment to shrink by 0.7% in 2023, before recovering by 0.2% in the following year. As the economic environment deteriorates, a higher number of company insolvencies are expected.

High inflation, a squeeze on corporate profits and the ensuing cost of living crisis are a direct result of the imbalance caused by the lockdowns. Russia’s war on Ukraine further only added to inflation as imports of Russian gas were reduced leading to a surge in energy prices. Food prices also rose as Ukraine’s exports were impacted. Along with Russia, it supplies half the world’s exports of vegetable oils.

However, the unemployment rate remains low at 3.7%, close to the lowest level in five decades. What’s more, businesses are still desperate for staff, and this is resulting in labour market tightness, which is driving higher earnings . Deutsche Bank says, “The UK’s labour supply shock has been nothing short of historic”.

It adds “In the last 12 labour market reports, AWE Regular Pay has outshot consensus expectations 10 times.”, where AWE refers to average weekly earnings. Further, wages have seen “the strongest growth outside of the coronavirus (COVID-19) pandemic period” according to the Office of National Statistics (ONS).

Sources include: OECD, KPMG, Deutsch Bank and UK Government.