Economic report 2023

In 2023, the global economy expanded moderately. The World Bank put global real gross domestic product (GDP) growth at 2.6% in 2023 (previous year: 3.0%). The global economy faced the challenges of the fight against inflation and the associated tightening of financing conditions, as well as the impact of geopolitical tensions. Economic activity has weakened, particularly in interest rate-sensitive sectors, such as real estate and investment. However, in some segments, companies’ self-financing abilities, as well as the growing trend towards projects with environmentally friendly or social aspects, have been able to support investment activity. Despite falling real incomes due to inflation, the robust labour market supported consumer sentiment, with regional differences.

In general, growth divergence was observed, with emerging markets performing more strongly than developed markets. Over the year as a whole, the aggregate expansion rate of the industrialised countries was 1.5%; growth was stronger in emerging markets at 4.0%. Growth in Europe remained subdued compared to the US and some Asian and commodity-producing countries, as the energy price crisis had a greater impact.[1]

The World Trade Organisation (WTO) noted slowing momentum in global trade, with real growth of around 1% for 2023 (previous year): 3%) – a weaker trend compared to the global economy.[2] Taking into account the price trend marked by lower commodity prices, global trade presumably fell by a nominal 4.5% from its record level in the previous year. Goods trade has been impacted by a slowdown in global value chain integration and declining inventory as disruptions subside, accompanied by a trend towards increased domestic procurement and more restrictive trade policy. In addition, a bilateral trade preference with countries with similar geopolitical interests (“friend shoring”) could be identified. There was also the weaker economy in some trade-intensive European and Asian countries, as well as dampening effects from more restrictive conditions for Trade Finance. Weak trade performance is also due to the fact that global economic growth had a less trade-intensive composition, as a higher proportion of domestic demand was driven by consumption, while more trade-intensive investment remained more subdued.[3]

Industrialised countries: USA – Eurozone – Germany

Despite tighter monetary policy in the USA, the economy had held up well so that real GDP expanded more strongly in 2023 at an expected 2.5% than in the previous year at 1.9%.[4]

According to the EU Commission, economic momentum in the eurozone has slowed after the robust post-pandemic expansion of 2021/2022 in contrast to the USA. Despite weak global trade, net foreign trade contributed modestly to growth, as the decline in imports was stronger than the decline in exports amid restrained domestic demand. Exports were impacted by weak Chinese growth and geopolitical tensions, among other things.[5]

For Germany, GDP declined by 0.3% for the full year of 2023. Private consumption fell particularly due to the lingering decline in purchasing power during the energy price crisis and due to consumer restraint against the background of geopolitical uncertainties. Increased interest rates led to a cool-down, particularly in the partially overheated real estate market.[6] An industrial weakness was particularly evident in energy-intensive sectors, such as the export-oriented chemical industry, with signs of energy-intensive production shifting to other locations. The high order backlog also melted away. Expansive stimulus came from government investment, partly through the procurement of armaments. There was also a lack of stimulus from foreign trade. Exports fell by 1.8% in real terms in 2023. The largest declines were in the export of capital goods and consumer durables. The price competitiveness of German exporters with respect to their most important trading partners deteriorated by around 3%. This is mainly due to exchange rate appreciation vis-à-vis China and the USA.[7]

Emerging and developing countries

Economic growth in the emerging markets apparently rose slightly to 4.0% in 2023 (previous year: 3.7%); in contrast, without China, it is said to have been at a lower 3.2%. Weaker demand from industrialised countries dampened demand for exports, while higher interest rates slowed domestic demand. A high degree of heterogeneity can still be noted. In many commodity-exporting countries, global weakness in the industrial sector was felt, as well as the lower demand from China’s construction segment to a certain extent. A number of commodity-importing countries continued to suffer from the impact of the year’s high agricultural and energy prices, which weighed on purchasing power and consumption.[8]

Asia

In Asia, economic growth presumably accelerated to 5.2% in 2023 (previous year: 4.5%).9 This was primarily driven by the reopening of the Chinese economy, which grew by 5.2%. In China, the structural real estate crisis was masked by government stimulation measures, including interest rate cuts. Nevertheless, the real estate sector weighed on demand due to its great importance from a macroeconomic perspective. India’s economy was once again that of one of the most expansive countries in the world with growth of 6.3%. Indonesia’s economy also had above-average growth at 5.0%. In many other export-dependent countries in Southeast Asia, the economy slowed.[10]

Latin America

Latin American economic growth almost halved, from 3.9% in 2022 to around 2.2% in 2023. The headwinds included increased inflation, tighter financial conditions, weaker global trade and adverse weather effects. Brazil performed better amid positive developments in the agricultural sector, private consumption and export products. The first key interest rate cuts also took place. Mexico benefited from robust private consumption and stronger investment demand, given near-shoring stimulus, particularly as a result of strong demand from the neighbouring USA. On the other hand, numerous commodity-exporting countries, such as Chile and Peru, suffered from weak international demand and weakening global market prices.[11]

Eastern Europe and Central Asia

Economic growth in Eastern Europe and Central Asia increased by approximately 2.7% in 2023 (previous year: 1.2%). The recovery was based on rising private consumption, supported by government stimulus packages, a robust labour market and slight growth rates in Russia and Ukraine. A partial reallocation of capital and trade flows in connection with Russia was able to support domestic demand in some national economies. Above-average growth rates were achieved in Central Asia (4.9%). In Turkey (4.2%), the economy initially benefited from a looser monetary policy, which became much tighter over the course of the year, as well as reconstruction projects following the earthquake in February 2023. Growth was weakest in the Eastern European EU countries, given the close links with Western Europe.[12]

Africa and the Near East

For 2023, the World Bank expected a slowed economic expansion of 2.9% (previous year: 3.7%) for Sub-Saharan Africa. In general, there were various influencing factors. While dwindling oil fields in Angola led to restrictions on expenditure, Nigeria was impacted by currency shortages. South Africa continued to experience power shortages. In addition, the global effects of weaker international demand and a restrictive monetary policy to fight inflation were also observed. Against the trend, the two East African countries Tanzania and Uganda, boosted by state investment programmes, grew more strongly at rates of over 5%. In the Near East, oil-exporting countries voluntarily curtailed production to stabilise the lower oil price, while other economic sectors performed strongly. In some countries, the economy was in turn affected by conflicts, including the war in Israel and Gaza, which erupted in October 2023.[13]

International funding conditions

The major central banks of industrialised countries continued to tighten monetary policy in 2023, reaching the highest key interest rate level in the last 20 years to contain the remaining inflationary pressures. The US Federal Reserve (Fed) raised key interest rates by another 100 basis points from the start of the year to July, reaching a range of 5.25% to 5.50%, even in light of the robust economy. After an interest rate pause, the Fed signalled that interest rates were close to the peak at the end of the year, rhetorically preparing for a possible easing of monetary policy.[14] In parallel, the European Central Bank (ECB) had raised interest rates by 200 basis points to 4.5% by September 2023, against the backdrop of continued core inflation. The ECB’s monetary tightening also included a reduction in bond holdings. The reinvestment of repayment amounts is only envisaged on a flexible basis in the Pandemic Emergency Purchase Programme until the end of 2024. In contrast to the USA, the ECB had not yet broached the issue of any interest rate cuts by year-end due to its inflation forecasts.[15]

Long-term interest rates in many countries continued to rise temporarily, given tight monetary policy, the inflation outlook and Spill-over effects from the USA. The ten-year US state and federal bonds reached their highest levels in the last decade at the beginning of October 2023, at 4.7% and 2.7%, respectively.[16] Uncertainties about the development of short-term interest rates and inflation were reflected in volatility. Towards the end of the year, capital market interest rates declined slightly as inflationary pressures eased and the economic outlook moderated. Geopolitical escalation in the Near East had a limited impact on financial markets in autumn. The yield curve has been negative for some time. The higher key interest rate level generally had an effect on financing conditions. Lending momentum slowed significantly over the course of the year. In addition to rising lending rates, there was also the following: a tightening of lending policies in view of increased credit risks and weakening economic outlooks, as well as lower demand for loans.[17]

There was a split development in the emerging markets. Some central banks had started cutting interest rates over the course of the year amid falling inflation rates. However, in countries with a weaker credit rating, financing conditions remained tight, which was reflected in higher risk premiums on relevant government bonds in the international capital market. In addition, the value of currencies of affected emerging markets declined sharply last year, in some cases more than 30%. However, debt service remained sustainable in many countries due to a high level of financing at low fixed rates. In China, the financial market was influenced by the real estate crisis.[18]

Commodities

On a US dollar (USD) basis, commodity prices broadly fell on the back of lower demand but remained 40% above pre-pandemic levels in 2023. The price of oil was volatile but fell to an average of USD 83 per barrel for the year from USD 100 per barrel in 2022. OPEC+ production cuts were largely offset by production expansions in the USA and Iran. The price drop in autumn was temporarily interrupted by the Middle East conflict.[19] The TTF gas price fell due to full inventories and savings effects in Europe. Metal prices declined slightly due to weak demand from China and high global market inventories, even though higher production costs and supply bottlenecks arose for individual commodities (copper, aluminium). Agriculture prices also declined, stabilising in autumn at around 30% above pre-pandemic levels.[20]

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[1] Cf. The World Bank. Global Economic Prospects. January 2024. Washington, DC. URL: www.worldbank.org/en/publication/global-economic-prospects. Short reference: World Bank 2024
[2] Cf. World Trade Organization (WTO). Global Trade Outlook and Statistics. URL: www.wto.org/english/res_e/ publications_e/gtos_updt_oct23_e.htm
[3] Cf. UNCTAD. Global Trade Update. December 2023. URL: unctad.org/publication/global-trade-update-december-2023
[4] Cf. World Bank 2024.
[5] Cf. ifo Institut. ifo Konjunkturprognose [Economic Forecast] Winter 2023. URL: www.ifo.de/DocDL/sd-2023-digital- 04-wollmershaeuser-etal-konjunkturprognose-herbst-2023_0.pdf. Short reference: ifo 2023.
[6] Cf. Bundesministerium für Wirtschaft und Klimaschutz [Federal Ministry of Economic Affairs and Climate Protection]. Die wirtschaftliche Lage in Deutschland im Januar 2024 und vorläufige Zahlen zum BIP 2023 [The economic situation in Germany in January 2024 and preliminary figures on GDP in 2023]. URL: www.bmwk.de/Redaktion/DE/Pressemitteilungen/Wirtschaftliche-Lage/2024/20240115-die-wirtschaftliche-lage-in-deutschland-im-januar-2024.html.
[7] Cf. ifo 2023.
[8] Cf. World Bank 2024.
[9] Cf. International Monetary Fund (IMF). World Economic Outlook: Navigating Global Divergences. Washington, DC. October 2023. URL: www.imf.org/en/Publications/WEO/Issues/2023/10/10/world-economic-outlook-october-2023
[10] Cf. World Bank 2024.
[11] Cf. World Bank 2024.
[12] Cf. World Bank 2024.
[13] Cf. World Bank 2024.
[14] Cf. Federal Reserve. Monetary Policy. FOMC Statement. 2023. URL: www.federalreserve.gov/monetarypolicy.html.
[15] Cf. European Central Bank. Monetary policy decisions. URL: www.ecb.europa.eu/press/pr/date/2023/html/ ecb.mp231214~9846e62f62.de.html
[16] Cf. EZB 2023.
[17] Cf. EZB 2023.
[18] Cf. World Bank 2024.
[19] Cf. World Bank 2024.
[20] Cf. European Commission 2023.