The outlook for the global economy took a positive turn in the
first half of 2023 as inflationary pressures began to ease, but
ongoing geopolitical tensions and domestic challenges in key
markets are slowing any return to sustained growth, according to
the latest forecast from KPMG.

According to KPMG’s latest Global Economic Outlook report,
global energy prices returning to levels last seen prior to the
invasion of Ukraine, combined with easing commodity and food
prices, have helped put further downward pressure on inflation for
the rest of 2023.

Despite the positive news, major economies throughout the world
– most recently the UK and USA – are facing their own
domestic pressures, delaying any hopes of improving market
conditions and a drop in inflation. 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 a number of
territories. Growing fears for the wider international banking
system could further complicate matters for central banks as they
weigh in financial stability risks against a plan to bring
inflation back to target.

The global organization is forecasting GDP growth of 2.1 percent
in 2023 and 2.6 percent in 2024 with inflation forecast at 5.3
percent in 2023 and 3.2 percent in 2024, and global unemployment
levels of 5.2 percent in 2023 and 5.4 percent in 2024.

Yael Selfin, Chief Economist at KPMG in the UK,
said:

“Despite the resilience of the labor market and the
improving inflation conditions, we expect global economic growth to
be relatively modest over the next two years, and to stay below its
long-term average. Global growth is expected to be driven by the
recovery of the Chinese economy and a relatively strong growth in
some of the emerging markets, while Eurozone and the US economy are
expected to contribute less to global growth over the next two
years. Risks to the outlook are broadly skewed to the downside
given the volatility in financial markets.

“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. The ramifications of some of these
headwinds may not have surfaced yet and we are still to see their
full impact and how they interact.”

With monetary policy focused on moderating inflation while
stabilizing financial markets, fiscal policy is left as the
potential tool to boost economic growth. Unfortunately, the public
finances have deteriorated significantly over the past three years.
Governments have spent significant amounts on first shielding their
economies from Covid-19 and subsequently on protecting households
and businesses from higher energy prices. That left public debt at
historically elevated levels, with less room for expansionary
fiscal policy. Even in the U.S., federal spending is expected to
slow despite the ramp up in infrastructure spending, although in
China fiscal support is to be stepped up following the reopening of
the economy. The rise in interest rates has made these larger debt
levels more costly to service, putting further pressure on
government finances. Nevertheless, some positive growth momentum is
expected this year from the relatively smooth reopening of the
Chinese economy following the lifting of Covid-related restrictions
in December last year.

The pressure on global supply chains has eased significantly in
recent months, while shipping costs have dropped too. This should
help alleviate some inflationary pressures and improve supply
capacity. Global trade remains relatively weak, although 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. Consumer demand is
also expected to pick up this year, with excess savings –
money saved during the pandemic when spending on certain services
was not possible – still relatively high in China and Europe,
which could potentially be deployed once confidence returns.
Indeed, consumer confidence has started to improve in Europe,
although it remains at relatively low levels.

Regina Mayor, Global Head of Clients & Markets at
KPMG, commented:

“How we get back to sustainable, long-term growth is the
big question facing boardrooms and political chambers around the
world right now. Some of the biggest inflationary fears –
widely predicted late last year – have been mitigated by more
direct, pro-active political action geared especially towards
getting rising energy prices down. There are also signs that other
commodities and food prices are finally starting to ease –
helping consumers and business owners who’ve been facing a
significant financial squeeze.

“The actions taken over the coming months are likely to
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 tightness of the labor market faced
post-pandemic shows little sign of easing. It’s an indication
of the complexities the world faces today. Strong employment
figures are often held up as an example of buoyant market
conditions, but they can also reflect the challenges central banks
are facing as they attempt to juggle wage expectations, tightened
credit conditions and the ever-present danger that any shift in the
conflict in Ukraine could bring inflation back into the mix. The
upside of a strong labor market, combined with relatively strong
personal savings among consumers – especially in Europe and
the Americas – means we could start to see robust consumer
spending, driving a return to slow-but-steady domestic growth in
key markets.”

Tassos Yiasemides, Board Member and Head of Corporate
and Global Compliance Management Services, commented:

“The global economy is called to operate in an environment
that imposes a mixture of challenges with rising interest rates,
signs of a slowdown, persistence of inflationary pressures despite
their reduction and geostrategic confrontations.

Improved conditions in the supply chain reinforce the inflation
reduction efforts at a time of structural problems in the food
market and decisions to limit oil production, as a result of the
new geostrategic realities. It is obvious that a new political and
economic international map is already taking shape.

The individual’s and businesses’ savings as a result of
the pandemic and the strengthening of employment, keep consumption
at satisfactory levels despite the significant tightening of
monetary policy.

Central banks around the world are trying to curb inflation
which is at high levels and causes restrictions on the purchasing
power of consumers. It is to be expected that the increase in
borrowing costs and the limitation of liquidity will lead to the
postponement of investments and business initiatives, which as a
result will slow down the economies. An important parameter is the
maintenance of financial stability, since loan and investment
portfolios may be negatively affected.

The Cypriot economy during the first quarter of 2023 continues
to show resilience with the real estate, tourism and professional
services sectors recording positive returns, while a good year is
predicted for tourism. The shipping sector, despite the challenges,
continues to contribute significantly to the GDP while the
education and health sectors are strengthened. The establishment of
foreign companies in Cyprus has multiple benefits for the
country.

The strengthening of reforms, green transition, simplification
of procedures in government departments through the implementation
of e-government initiatives are major priorities for maintaining
the country’s competitiveness and enhancing the quality of
services offered to citizens, as it is particularly important to
maintain social cohesion.

Equally important is the assessment of conditions in the global
economy, with estimates pointing to an increase in recessionary
pressures in the second half of the year.”