Our top 10 calls for 2023

In this Global Economic Outlook, we look ahead to 2023 and outline our top ten calls for the global economy. These include predictions on inflation, the war in Ukraine, electric vehicles and Covid-19 in China.

1: Global growth will slow from 2022

We expect both the US and Europe to experience recessions over the next year. Europe is grappling with an energy crisis and inflation remains high on both sides of the Atlantic. This will drive a sharp fall in world growth to 1.3% in 2023, from 3.0% in 2022. We expect growth in industrial production to decelerate to 1.8%, from 3.2% in 2022. However, we expect GDP growth in China to accelerate to 4.9% (from 3.4% in 2022) – although this is still well below average growth rates before the pandemic. Emerging markets will prove resilient, growing at 3.1%.

2: CRU’s basket of commodity prices will be lower in 2023

Despite the supply shock created by Russia’s invasion of Ukraine, most commodity prices have declined from their peaks amid concerns of an impending global recession. Looking ahead, this downside trend is set to continue next year, except for energy commodities. CRU’s basket of 38 mining, metals and fertiliser price forecasts is estimated to decline by 18.1% y/y in 2023 (Figure 2). We expect demand to weaken globally due to the negative economic outlook, dragging on raw materials, fertiliser and metals prices. With high energy prices and weak demand, margins have already shrunk through 2022 and are likely to remain under pressure, with continued curtailments in fertilisers and energy-intensive metals sectors, particularly in Europe. Looking further ahead, in the medium-term, demand from the ‘green energy transition’ will provide support for metals and raw material prices.

3: There will be no normalisation of trade between Russia and the West

The war in Ukraine – and the accompanying sanctions – has caused major changes in trading patterns. The loss of Black Sea access has reduced flows of grain, fertilizers and steel. Russian oil exports have diverted from Europe to India and China (Figure 3). Most seriously, in an effort to apply pressure on Europe, Russia has reduced flows of natural gas to a fraction of their pre-war levels.

The path of the war from here is unclear. Our central case is that the conflict drags on for some time. Even if there were to be a quick end to the fighting, most sanctions would probably remain in place to maintain pressure. Some of the risk premium would fall out of energy prices, but Europe’s drive to pivot away from Russia as a supplier – and Russia’s drive to pivot to customers in Asia – would continue.

4: European gas prices will average €150 /MWh, x11 2019 levels

This autumn the TTF European gas benchmark price slid dramatically from its August peaks, pushed down by robust EU gas storage levels. This has reduced some of the pressure on economies in Europe, and led some commentators to argue that the end of the energy crisis is in sight. However, we think this is premature and believe there is a high chance of prices moving above current levels, and remaining volatile.

Inventories will have dropped significantly by March. These inventories will need to be rebuilt ahead of winter 2023/24. Without Russian pipeline gas, this will be very difficult. Figure 4 shows how big the challenge will be (see our recent insight for more detail). In this environment we expect gas prices to average €150/MWh, much lower than August’s high of €338/MWh, but around eleven times higher than the average 2019 price. Volatility is also likely to be much higher than in the pre-war environment. More of Europe’s gas supplies will come from LNG, which is more likely to be sold in the spot market instead of through long-term contracts. Although the European Commission is proposing to cap the wholesale price at €275/MWh, this would only have an effect in the most extreme circumstances, and has anyway still not been agreed by all member states.

European industry has cut its consumption of gas considerably, with widespread curtailments of capacity in energy- or gas-intensive sectors such as Fertilizers or Aluminium. If high and volatile prices persist, many of these curtailments are likely to become permanent.

5: Inflation will fall quickly in both the US and Europe

The energy crisis, supply chain problems and tight labour markets have led to inflation levels unprecedented in recent U.S. and Eurozone history (Figure 5). In October 2022, CPI inflation was at 10.6% y/y in the Eurozone and 7.7% in the US. High inflation will remain a pressing concern in 2023. However, as central banks continue to tighten monetary policy in their fight against inflation and pressure from high energy prices, especially in Europe, eases, we forecast inflation to fall sharply. We expect inflation in the Eurozone to remain higher than the US during most of 2023, undershooting it in the final quarter of 2023. Major risks remain: a renewed European energy crisis in winter 23/24, a wage price spiral in either the US or Europe, and further global supply-chain disruptions (for example from the rapidly deteriorating Covid situation in China) could all trigger a new round of inflation. However, for now recent data releases for producer and consumer prices, as well as evidence from business surveys, points to inflation reaching a turning point.

Continue reading this insight here.

This Global Economic Outlook is provided as part of our monthly global economic outlook service for CRU customers. Watch CRU's economics team, Alex Tuckett, Arthur Wang and Veronika Akhmadieva discuss our major economic calls to look out for.