Kristalina Georgieva, Director of the International Monetary Fund, warned of the difficulties facing the global economy in 2023, stressing that that year will be a difficult year in light of the suffering of the main engine of global growth - the United States, Europe and China - from weakness.
According to Arabiya.net, Georgieva told a news program on CBS: The new year will be more difficult than the year we left.
She noted that the three major economies — the United States, the European Union, and China — are all slowing simultaneously.
She explained that the year 2023 will be difficult for most of the global economy, as a third of the global economy is expected to enter a recession during the year.
Half of European economies will enter recession, and the increase in Covid infections in China is worrying news for the global economy in the near term, according to Georgieva.
She pointed out that the prospects for emerging economies are worse due to debt levels and the strength of the dollar.
On the other hand, Athanasius Vamvakidis, head of the G10 foreign exchange strategy at Bank of America, expected in an interview with Al Arabiya that the dollar would decline in 2023, while remaining strong compared to historical levels.
Vamvakidis pointed out the possibility of raising interest rates more than expected by central banks, while inflation remains above target levels. He said that the dollar reached its highest level in 40 years two months ago, and also the core inflation level reached the highest level in 40 years, and the two things are related.
He added that we expect the beginning of a decline in inflation in the current year, and that the Fed will stop raising interest rates at some point, but at the same time it is important to be aware that the dollar’s decline will not be a straight line, as the markets calculate a high probability of this scenario.
He explained that the bank's expectations for the euro against the dollar by the end of 2022 were at 1.10 and now at 1.06, and the consensus of experts is at 1.07, and therefore these movements were largely expected, and actually occurred.
The concern for us is that the markets are ahead of themselves and accelerating, and although we expect a slowdown in inflation in 2023 compared to 2022, we believe that the decline in inflation will be very slow, and will remain above the levels targeted by central banks, and the Federal Reserve and other banks will be forced to raise interest rates more than the markets expect. And it will maintain a higher interest level for a longer period, and this heralds fluctuations in the markets in the coming period, according to the head of the G10 foreign exchange strategy at Bank of America.
He explained that the dollar may strengthen at the beginning of this year, although it declined during the last two months of 2022, and then it will return to decline. He pointed out that the goal of the Fed's tightening is a weaker dollar, because this will push inflation to decline, but to reach that, the Fed will have to go through the stage of a strong dollar before reaching a weak dollar.
Don't cut back soon for interest
He said that the markets hope that the Fed will slow down, and they calculate that it will cut interest rates in the second half of 2023, but what is remarkable is that the markets expect the most severe rate cut after the tightening cycle.
It must be remembered that inflation today is not only high, but several times higher than the target level of the Fed, and although headline inflation has begun to decline, the core inflation rate is still high, and service inflation has not moved, so inflation is likely to remain higher than The target level, not only over the course of 2023 but also 2024 and if the Fed slows down or stops raising interest rates earlier and more than necessary, or if the Fed starts cutting rates at a time when inflation rates remain above target, this will lead to a loss of credibility For the federalist, according to Athanasius Vamvakidis.
He continued: We do not expect the Fed to make this mistake, and it will not be easy, because the higher interest rate for a longer period predicts challenges for the economy, stagnation and financial stability, and the real estate sector will not like this situation, and it will not be easy, but we believe that inflation is so high that the Fed And any other central bank that has no room to abandon tightening, now they must focus on inflation, and therefore we do not expect the Fed or any other central bank to change their tightening policies early this year.
Great fears of stagflation
We see that the prevailing expectations are exaggeratedly optimistic that inflation will decline to 2% by 2024 without a global recession, and our expectations are more pessimistic, we expect inflation to remain high for a longer period, and we expect a recession, but the reality is that there is a dangerous scenario, which is stagflation and in Inflation stays high for too long, with a deeper and worse-than-expected recession.
He said that what makes the issue of accurate prediction difficult is that we start from a point where inflation is very high, and historically we have not seen such high inflation in a short period, and when it happened it takes a long time to return to 2%.
Regarding employment, he said that what is remarkable is that the labor market is still strong in all parts of the world and surprisingly flexible, and we may need more weakness in the labor market, perhaps a significant rise in unemployment rates in order to reach the target inflation levels, and what makes forecasting difficult is that we do not know How deep a recession do we need?
We are dealing with an economy that has been accustomed to low interest rates over the past 20 years, and until now the markets have dealt well with all of this, although we witnessed a decline in stocks in 2022, but the market has optimistic expectations for the next year or two, and we need stagnation to return inflation to a lower level. Thus, we will need to adjust market expectations, and this makes the future vision blurry, according to Vamvakidis.
