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rejoice. The economic prospects for 2023 are better than you think

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Polls of economists at the end of 2022 in weAnd Euro-zone And United kingdom It was relentlessly grim, peppered with predictions of a recession, higher unemployment, and continuing inflation problems. The head of the International Monetary Fund, Kristalina Georgieva, Speaking of tougher 12 months ago It predicts that a third of the world will suffer from recession. It’s frustrating stuff. Fortunately, these accounts may be wrong. We should all cheer up a bit.

The evidence suggests that economic performance in 2023 will not be as bad as most economists say. We will probably end the year richer, safer and more content than we did at the beginning.

There is no doubt that the global backdrop of 2023 is challenging. Households and businesses have weathered the pandemic, inflation, record energy costs, and food price crisis over the past three years. But the worst effects of it are already over.

Therefore, part of my larger optimism is based on an important and near-universal misunderstanding of economic forecasts. Often, past events are presented as yet to come.

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International Monetary Fund Latest forecast From October, for example, he predicted global growth would drop from 3.2 percent in 2022 to 2.7 percent in 2023. This reinforced Georgieva’s comment that this year would be “tougher than the year we leave behind.” The problem is that the information conveyed by these average annual growth rates does not fit into the reasonable interpretation of most people.

It might surprise you that in the fund’s case, the relatively strong 2022 reading is due to rapid growth at the end of the lockdown in late 2021 and the expectation of weakness for 2023 is primarily due to the energy crisis of the previous year.

Translated into economic activity that only takes place during the year in question – in line with most forecasters’ expectations – the story changes completely. In contrast to next year, the International Monetary Fund expects the global economy to grow by 2.7 percent during 2023, which is significantly more than the 1.7 percent that is believed to have occurred during 2022.

The IMF is not alone in providing key growth forecasts that its officials find difficult to articulate. Organization for Economic Co-operation and Development he said in november That growth in advanced economies will decline in 2023, however Quarterly forecasts From the same publication it appears that it expects the growth of advanced economies to improve in each quarter of this year. Most people would see this as progress rather than regression.

These failures to translate numerical projections into a compelling and accurate narrative should cause us concern. It creates an unnecessarily bleak outlook that has self-fulfilling characteristics.

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Recognizing these supply issues should make us happier by 2023. But few FT readers will fail to notice the second problem with these forecasts: they are outdated. Any assessment for the coming year must take into account two important changes in the assumptions underlying the global outlook.

The first reflects natural gas prices. The IMF and OECD forecasts were prepared in the fall and were based on financial market projections of future natural gas prices at that time. The Organization for Economic Co-operation and Development, for example, has predicted that wholesale gas prices in Europe will average €150 per megawatt-hour over this year and next.

Current market expectations are for prices to be around half that level. The easing of the energy crisis is an impeccable boost to the European economic outlook. Lower energy prices will improve income, growth and fiscal prospects while lowering headline inflation. This is of crucial importance for Europe, which is a large energy importer.

The second change in assumptions must take into account China’s termination of its policy on the non-spread of the coronavirus. The virus is creating misery for many, but deregulation is likely to be positive for both the Chinese and global economic prospects later this year.

India’s devastating delta wave in the spring of 2021 led to a greater than 8 percent drop in gross domestic product in the second quarter of that year, followed by a similar rise in the third quarter and another 5 percent gain in the fourth quarter. After the current wave of infections, China’s economic rebound should be stronger, if anything, because ending forced lockdowns will ease supply chain pressures. Global trade bottlenecks must improve.

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We must of course not get swept up in a wave of optimism. Even with lower inflation, battles between workers, businesses, and taxpayers over accumulated losses from the economic crises of recent years could continue. Olivier Blanchard, former chief economist at the International Monetary Fund, also warned that it could keep price increases too high for a very long time. Likewise, the huge uncertainty about the severity of these conflicts may cause central banks to over-control inflation and undermine economic progress. Macroeconomic policy errors are thus highly likely in 2023.

But uncertainty of this kind is an ongoing fact of life. As the year begins, we can say the following with some confidence. Almost all current forecasts indicate that growth in the global economy is likely to improve in 2023 and the future outlook will remain more optimistic. Contrary to the dismal comments from economists and officials, we should be cautiously optimistic about the coming year.

chris.giles@ft.com

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Central banks can’t win when it comes to inflationary credibility

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The writer is a former central banker and professor of finance at the University of Chicago Booth School of Business

Why does the US Federal Reserve find it so difficult to convince the market that it means business when it comes to not cutting rates? The minutes of the December meeting clearly stated, “No participant anticipated that it would be appropriate to begin lowering the federal funds rate target in 2023.” However, this hawkish statement did little to change market expectations, making the Fed’s task of slowing the economy even more difficult.

Central bank statements have an impact because people still believe that institutions will do what they say. This credibility is obtained through a combination of central banks’ reputations (either dovish or hawkish), past actions, and the policy tools they possess and the frameworks under which they operate. Unfortunately, the kind of credibility needed to escape a system of very low inflation, which we had until recently, is different from the kind needed to curb high inflation, which we have now. Credibility, by its very nature, does not turn into a dime.

Traditionally, central banks have grappled with high rates of inflation. Government spending usually overestimates the economy to generate growth. Central banks helped and abetted this, not only by keeping interest rates low, but by financing government spending. In the process, they managed to stoke inflation, which hurt growth where it had taken hold. Then, perhaps learning from the Fed under Paul Volcker, countries decided it was best to have an independent technocratic central bank, mandated to keep inflation in check through an inflation targeting framework. Thus, banks gained credibility as an inflation fighter.

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But after the global financial crisis, inflation dropped dramatically, making the challenge push it up again. In order to increase inflation, central banks had to develop a new kind of credibility. In the words of economist Paul Krugman, they should have “credibly promised to be irresponsible” when they saw inflation, by committing to curbing it rather than fighting it furiously.

And so central banks adopted a new set of tools. Quantitative easing, for example, whereby the bank announces that it will buy government bonds for an extended period, worked in part by requiring the bank not to raise interest rates until the announced buying program ends. In fact, this may be part of the reason why both the Federal Reserve and the European Central Bank were slow to raise interest rates when inflation picked up in late 2021. Central banks also acted in ways that undermined beliefs about their intent to raise rates, as they did when they halted rate increases. After the markets started to faint in late 2018.

Finally, central banks have changed their frameworks to include inflation tolerance within them. A key component of the Fed’s new framework, adopted in 2020, was that it would not be preemptive in avoiding inflation. The old mantra abandoned, if you’re staring at swelled eyeballs it’s already too late.

While none of this was particularly effective in raising inflation, it may have encouraged the government to spend more, knowing that the central bank would not raise interest rates quickly. When the pandemic hit, there were few restrictions on government spending that, along with the war in Ukraine, pushed us back into a system of high inflation. But central banks again find themselves with the wrong kind of credibility – that is, the assumption that they will tolerate inflation. No wonder markets continue to price in Fed cuts, even as the Fed insists it won’t become accommodative until inflation is tamed. In short, the credibility of a central bank is useful only when it is relevant to the inflationary system it faces.

Should the Fed act again to restore its credibility as an inflation hawk? It takes a long time to build credibility, and inflation regimes can change again. It is not inconceivable that an aging population, declining immigration, deglobalisation, and a slowing China could push the world back into a low-growth-inflationary environment.

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However, central banks are likely to be more effective if they rebuild their commitment to combating high inflation. And if inflation gets too low, maybe we should learn to live with it. It’s hard to argue that all the frantic activity in the recent low-inflationary regime was effective, distorting credit, asset prices, and liquidity in ways that hurt us today. But as long as low inflation does not collapse into a rapid deflationary spiral, central banks should not worry excessively. Instead, they should shift the burden back to governments and the private sector when it comes to achieving sustainable growth.

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Biden declares state of emergency in California due to winter storms via Reuters

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© Reuters. FILE PHOTO: US President Joe Biden delivers remarks during a ceremony marking two years since the January 6, 2021 attack on the US Capitol in the East Room of the White House in Washington on January 6, 2023. REUTERS/Kevin LaMarque

(Reuters) – US President Joe Biden approved a declaration of emergency for California after a week of storms that killed at least 12 people in the past 10 days and knocked out power to hundreds of thousands of homes and businesses in the state.

The White House said in a statement that the emergency declaration authorizes the Federal Emergency Management Agency (FEMA) to coordinate disaster relief efforts and mobilize emergency resources.

Last week, severe weather brought violent gusts of wind that toppled trucks, flooded the streets of small towns along the Northern California coast, and led to a storm that destroyed a dock in Santa Cruz.

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Foreign policy experts say Russia is in danger of becoming a failed state

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Nearly half of leading foreign policy experts believe Russia will become a failed state or disintegrate by 2033, while large majorities expect China to try to take Taiwan by force, according to a new survey by the Atlantic Council that points to a decade of global globalization. Coming troubles.

Forty-six percent of the 167 experts who responded to the think tank said Russia’s failure or disintegration could happen in the next 10 years. In a separate question, 40 percent indicated Russia as a country they expect to disintegrate due to reasons including “revolution, civil war, or political disintegration” during that time.

said Peter Engelke, deputy director for forecasting at the Atlantic Council, who helped design and interpret the survey.

Western officials say Russia has been greatly weakened by its action Ukraine invasion 11 months ago, including via sanctions and export controls. Economists believe that Russia’s productive capacity is steadily deteriorating as a result of punitive measures, setting the country back by decades.

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Russian President Vladimir Putin has begun publicly acknowledging that Moscow faces setbacks in Ukraine and that the conflict will take a long time. The United States and its Western allies have pledged to support Ukraine for as long as they can, with all sides making plans to drag the war on for years.

Even as Europe is experiencing its biggest territorial conflict since World War II, the majority of experts surveyed said they did not think Russia and NATO would directly engage in military conflict in the next decade.

However, 70 percent of respondents predicted that Beijing would do so in the next ten years, backing up increasingly dire warnings by US officials that China would launch a military offensive to retake Taiwan.

US military leaders have pointed to 2027, the centenary of the founding of the Chinese People’s Liberation Army, as a possible invasion date. However, some officials have stepped up their warnings about Beijing’s intentions over the past year, and have said an invasion was possible before 2024.

US President Joe Biden has said repeatedly that Washington will defend Taiwan from Chinese attack, even as the US has historically tried to avoid articulating what it will do to deter both sides from acting.

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Other findings add to the picture of global chaos. Nearly 90 percent of respondents believe that at least one additional country will have nuclear weapons by 2033. Sixty-eight percent of them said Iran would be most likely to obtain a nuclear weapon, coming as possibilities for reviving a nuclear deal between the six world powers and becoming Iran is increasingly bleak. Echoing some optimism, 58 percent of experts said they believed nuclear weapons would remain unused over the next 10 years.

Foreign policy experts also predicted a certain degree of American backtracking. While 71 percent of those surveyed expect the United States to continue to be the world’s dominant military power by 2033, only 31 percent believe the United States will be the number one diplomatic power and 33 percent the preeminent economic power.

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