In this blog post, we will take a closer look at the Economic Forecast report and its significance in the business world. With the constant fluctuations in the global economy, it is crucial to have a clear understanding of the future economic landscape to make informed decisions.
We will explore the report's key findings, analyze the projections made by leading economists, and discuss how these insights can benefit businesses and investors. By the end of this post, you will have a better understanding of what the Economic Forecast 2023 report entails and how it can help you navigate the complex economic environment.
A recently released report by the Conference Board indicates that economic weakness will continue to intensify and spread throughout the US economy, leading to a recession in mid-2023. The key factors contributing to this outlook are persistent inflation and Federal Reserve hawkishness. The report forecasts that the real GDP growth rate will slow down to 0.7 percent in 2023, with a slight increase to 0.8 percent in 2024.
Although consumer spending has cooled down, it has not decreased as much as previously expected. As a result, the forecast for Q1 2023 real GDP has been raised from 1.0 percent to 2.0 percent. However, the forecast for Q2 2023 has been downgraded from -0.9 percent to -1.8 percent due to base effects from the stronger Q1 data and the March banking crisis.
While the worst of the crisis seems to be over, tight credit conditions and weakened consumer and business sentiment are expected to persist. The Federal Reserve is not expected to pause interest rate hikes until a terminal rate window of 5.25 to 5.50 percent is achieved in Q2 2023.
The report also addresses the issue of inflation. The Conference Board expects to see some progress in the coming quarters, but the path is likely to be bumpy. In Q2 2023, a significant decrease in the reported year-over-year PCE deflator is forecasted due to base effects. However, the fight to tame inflation is expected to continue, and year-over-year inflation readings are expected to remain around 3 percent until 2023 yearend. The Fed's 2 percent target is not expected to be achieved until the end of 2024.
Although labor market tightness is expected to moderate somewhat in the coming quarters, it will remain elevated relative to previous economic downturns. This is expected to prevent the overall economic growth rate from slipping too deeply into contractionary territory and facilitate a rebound in early 2024.
Looking ahead to 2024, the report predicts that overall growth will return to pre-pandemic rates, and inflation will drift closer to 2 percent. The Federal Reserve is expected to bring rates back below 4 percent. However, demographic challenges are likely to keep the labor market tight, presenting an ongoing challenge for the foreseeable future.
Economic Forecast: A Slightly More Optimistic but Fragile Outlook
The Organisation for Economic Co-operation and Development (OECD) has released its latest Interim Economic Outlook, which projects global growth to reach 2.6% in 2023 and 2.9% in 2024. The report states that improved business and consumer confidence, declining food and energy prices, and the reopening of the Chinese economy are contributing factors to this growth.
While headline inflation is expected to recede gradually through 2023 in most G20 countries, core inflation remains persistent. This is due to strong service price increases and cost pressures from tight labor markets. This means that inflationary pressures will require many central banks to maintain high policy rates well into 2024.
Annual GDP growth in the United States is projected at 1.5% in 2023 and 0.9% in 2024. Meanwhile, growth in the Eurozone is projected to be 0.8% in 2023 but pick up to 1.5% in 2024 as the drag on incomes from high energy prices recedes. Growth in China is expected to rebound to 5.3% this year and 4.9% in 2024.
OECD Secretary-General Mathias Cormann commented that the outlook today is slightly more optimistic than the organization’s previous forecasts, but the global economy remains fragile. The report highlights persistent large-scale energy and food market disruptions and Russia's war of aggression against Ukraine as key risks.
Moreover, financial market turbulence and the steady decline in underlying growth prospects could be sources of further disruption. Therefore, more targeted fiscal support and structural reforms are required to revive productivity growth and optimize the recovery and long-term growth prospects.
The report notes that the improvement in the outlook is at an early stage, and risks remain tilted to the downside. The war in Ukraine and its broader consequences is a key concern, and the overall impact of monetary policy changes is difficult to gauge, which could continue to expose financial and banking sector vulnerabilities. Pressures in global energy markets could also reappear, leading to renewed price spikes and higher inflationary pressures.
Monetary policy needs to remain restrictive until there are clear signs that underlying inflationary pressures are lowered durably. Furthermore, fiscal support should be prudent and needs to become more focused on those most in need to mitigate the impact of high food and energy prices.
Better targeting and a timely reduction in overall support would help to ensure fiscal sustainability, preserve incentives to lower energy use, and limit additional demand stimulus at a time of high inflation. Lastly, rekindling structural reform efforts is needed to revive productivity growth and alleviate supply constraints.
This includes enhancing business dynamism, lowering barriers to cross-border trade and economic migration, and fostering flexible and inclusive labor markets that would boost competition, mitigate supply shortages, and strengthen gains from digitalization. While the outlook has slightly improved, it remains fragile, and the risks remain tilted to the downside. Therefore, it is essential to continue with restrictive monetary policies, prudent fiscal support, and structural reforms to revive productivity growth and mitigate supply constraints to ensure a stable and sustainable economic recovery.
The following is a summary of OECD Global Economic Outlook for 2023-2024
- Global growth slowed to 3.2% in 2022 due to the impact of the war in Ukraine, the cost-of-living crisis, and a slowdown in China.
- Positive signs are emerging, including improving business and consumer sentiment, falling food and energy prices, and the full reopening of China.
- However, global growth is projected to remain below trend rates in 2023 and 2024, at 2.6% and 2.9% respectively, with policy tightening continuing to take effect.
Regional Growth Projections
- Annual GDP growth in the United States is projected to slow to 1.5% in 2023 and 0.9% in 2024.
- Growth in the euro area is projected to be 0.8% in 2023, but pick up to 1.5% in 2024.
- Growth in China is expected to rebound to 5.3% this year and 4.9% in 2024.
- Headline inflation is declining, but core inflation remains elevated due to strong service price increases, higher margins in some sectors, and cost pressures from tight labor markets.
- Inflation is projected to moderate gradually over 2023 and 2024 but to remain above central bank objectives until the latter half of 2024 in most countries.
Risks and Uncertainties
- Risks have become somewhat better balanced, but remain tilted to the downside.
- Uncertainty about the course of the war in Ukraine and its broader consequences is a key concern.
- Pressures in global energy markets could also reappear, leading to renewed price spikes and higher inflation.
- Monetary policy needs to remain restrictive until there are clear signs that underlying inflationary pressures are lowered durably.
- Fiscal support to mitigate the impact of high food and energy prices needs to become more focused on those most in need.
- Rekindling structural reform efforts is essential to revive productivity growth and alleviate supply constraints.
- Enhanced international cooperation is needed to help overcome food and energy insecurity, assist low-income countries service their debts, and achieve a better-coordinated approach to carbon mitigation efforts.
Economic Forecast for the Next 5 to 10 Years [2023 to 2033]
The US economy has experienced significant changes in recent years, including unprecedented events like the COVID-19 pandemic, political changes, and a global economic downturn. As we move forward, many people are interested in knowing what the future holds for the US economy over the next five to ten years. This section of the article provides an economic forecast for the next five to ten years, with a focus on economic output, inflation, interest rates, and the labor market.
The CBO's economic projections provide valuable insights into the US economy's future. While the US economy is projected to experience some challenges, including a tight labor market and rising interest rates, the economy is expected to continue growing, with a projected growth rate of 2.4 percent per year from 2024 to 2027.
Inflation is also expected to gradually decrease over the next few years, approaching the Federal Reserve's long-term goal of 2 percent by 2026. Interest rates are projected to rise in the near term but then gradually fall beginning in late 2023. The labor market is expected to be tight in the near term, with the unemployment rate projected to increase before gradually declining over the next few years.
These projections provide useful information for individuals, businesses, and policymakers as they plan for the future. However, it is important to note that economic forecasts are subject to uncertainty and can be influenced by a variety of factors, including unexpected events and changes in economic policy.
The Congressional Budget Office (CBO) projects that the US economy's output, or gross domestic product (GDP), will stop growing early this year in response to last year's sharp rise in interest rates. However, output is expected to start growing again during the second half of 2023, as falling inflation allows the Federal Reserve to reduce interest rates, causing rebounds in sectors of the economy that are sensitive to interest rates.
In CBO's projections, the growth of GDP comes to a halt in early 2023, mainly because of the sharp rise in interest rates last year, and then resumes at a slow pace. For 2023 as a whole, real GDP (that is, GDP adjusted to remove the effects of inflation) is projected to grow by just 0.1 percent. The growth of real GDP is projected to speed up thereafter, averaging 2.4 percent a year from 2024 to 2027, in response to declines in interest rates.
Inflation was higher in 2021 and 2022 than in any other years of the previous four decades, with a rate of 5.7 percent and 5.5 percent, respectively, as measured by the price index for personal consumption expenditures. The annual growth of that price index is projected to remain above the Federal Reserve's long-term goal of 2 percent through 2024 and then fall near to that goal by 2026.
However, CBO projects that inflation will slow gradually in 2023 as pressures ease from the factors that have caused demand to grow more rapidly than supply in recent years. The PCE inflation is projected to be 3.3 percent in 2023 and 2.4 percent in 2024. PCE inflation is projected to continue declining thereafter, approaching the Federal Reserve's long-run goal of 2 percent by 2026.
Of the categories that make up the PCE price index, food, energy, and shelter-related services are projected to experience the largest slowdowns in price growth in the next few years.
Interest rates on Treasury securities are projected to rise further in early 2023 and then gradually fall beginning in late 2023. In CBO's projections, interest rates on short-term Treasury securities move largely in concert with the federal funds rate, which the Federal Reserve sets. In the near term, CBO expects the federal funds rate to rise to 4.5 percent by the end of 2023 and to remain at that level for several years.
CBO has increased, on average, its projections of short- and long-term interest rates over the next five years, mostly because it has raised its near-term projections of inflation since May 2022.
The labor market is expected to be tight in the near term, with the unemployment rate projected to increase from 3.6 percent at the end of last year to 5.1 percent at the end of 2023 before gradually declining to 4.5 percent by the end of 2027.
Economic Outlook for 2028 to 2033: Projections and Analysis
This section will examine the CBO’s projections for income, GDP, and the overall economic outlook for the five years, between 2028 to 2033. The CBO’s economic projections for 2028–2033 indicate that the economy is projected to grow at its maximum sustainable output. However, this projection is subject to a high degree of uncertainty, and the actual economic growth rate could be affected by various factors. Despite this uncertainty, the projections offer insights into the potential growth rate of the economy, which is an essential consideration for policymakers, investors, and businesses alike.
Projected Growth of Real Potential GDP
The CBO projects that real potential GDP will grow at an average rate of 1.8% annually between 2028 and 2033. This growth rate is similar to the average annual growth rate of real potential GDP since 2007. However, this overall growth rate conceals two distinct components of growth: potential labor force growth and potential labor force productivity growth.
The potential labor force is projected to grow more slowly annually over the 2028–2033 period than it has since 2007, on average. In contrast, potential labor force productivity is expected to grow more rapidly than it has since 2007.
Projected Growth of Real GDP
Real GDP is projected to grow at an average rate of 1.8% annually between 2028 and 2033, the same rate as real potential GDP. This projection suggests that the economy will be operating at its maximum sustainable output over the next five years. However, this projection is subject to a high degree of uncertainty.
Projections of Income for 2023 to 2033
The CBO projects that nominal gross domestic income (GDI), which represents the total income earned in the production of GDP, will grow moderately through 2033. The projection estimates that nominal GDI will grow by 3.1% in 2023, an average of 4.8% in 2024 and 2025, and an average of 4.0% from 2026 to 2033. By the end of 2025, the nominal GDI is projected to be 35% higher than it was before the pandemic. By the end of 2033, it is expected to be 85% higher than before the pandemic.
Uncertainty About the Economic Outlook
The projections offered by the CBO are subject to a high degree of uncertainty. This uncertainty stems from a range of factors, including the effect of higher interest rates on overall demand, the easing of supply-chain disruptions, and labor market participation. Additionally, the growth of potential output in the aftermath of the pandemic could be faster or slower than expected.
Understanding the US Economic Cycle
The US economy goes through a cycle of expansion and recession, which has a significant impact on the country's economic growth, employment, and overall well-being. To help policymakers, researchers, and businesses understand the current state of the economy, the National Bureau of Economic Research (NBER) maintains a chronology of US business cycles.
What is Business Cycle Dating?
Business cycle dating is the process of identifying and dating the peaks and troughs of economic activity in an economy. The NBER's Business Cycle Dating Committee is responsible for determining the beginning and end dates of recessions and expansions in the US economy. The committee's chronology helps to provide a comprehensive understanding of the US economic cycle and serves as a reference point for policymakers, businesses, and researchers.
Understanding the Business Cycle
A business cycle is a period of economic expansion followed by a period of economic contraction. During the expansion phase, economic activity, such as employment, production, and consumption, increases, leading to economic growth. However, economic growth cannot continue indefinitely, and eventually, the economy reaches its peak. At this point, economic activity begins to slow down, leading to a recession.
The NBER defines a recession as a significant decline in economic activity that lasts more than a few months, affecting the economy broadly, and spread across different sectors. In contrast, an expansion is the period between a trough and a peak, during which economic activity increases. Most recessions are brief, and the economy typically returns to its previous peak level of activity or trend path.
How is Business Cycle Dating Done?
To determine the peaks and troughs of the US economy, the NBER's Business Cycle Dating Committee uses a range of monthly and quarterly measures of aggregate real economic activity published by federal statistical agencies. These measures include real personal income less transfers, nonfarm payroll employment, real personal consumption expenditures, wholesale-retail sales adjusted for price changes, and industrial production.
The committee makes a separate determination of the calendar quarter of a peak or trough, based on measures of aggregate economic activity over the relevant quarters. Two measures that are important in the determination of quarterly peaks and troughs, but that are not available monthly, are the expenditure-side and income-side estimates of real gross domestic product (GDP and GDI).
The committee considers these measures and weighs them based on their relevance to the current economic climate. There is no fixed rule about what measures contribute information to the process or how they are weighted in the committee's decisions. In recent decades, the two measures the committee has put the most weight on are real personal income less transfers and nonfarm payroll employment.
Why Business Cycle Dating Matters
Business cycle dating is essential in understanding the current state of the economy and its historical performance. By identifying the peaks and troughs of economic activity, policymakers can develop strategies to mitigate the negative effects of economic downturns and take advantage of economic upturns. Businesses can also use this information to plan their operations and investments.
Moreover, the NBER's business cycle chronology can help researchers understand the causes and consequences of economic cycles. Studying the historical performance of the US economy can provide insights into how economic policies, technological innovations, and external shocks can affect the economy and its various sectors.