Analysis: Risk of global recession falls substantially

Asia Pacific, Middle East, Africa lead the world’s growth

After global growth exceeded expectations in 2023, businesses’ perceived probability of a global recession has fallen substantially in 2024, according to Oxford Economics data.

Oxford’s global risk survey in January showed a recession probability of 7.2% — less than half of what it was in October 2023.

“That links to broader economic data that show that in some markets growth has been stronger than expected,” Oxford Economics Director of EMEA Macro Consulting Graeme Harrison said in a mid-February presentation to Grant Thornton International personnel on current macroeconomic conditions.

Some regions are lagging

While the outlook for global real GDP growth in 2024 remains above 2%, the growth rate is expected to be a few tenths of a percentage point slower than in 2023. That’s mostly due to conditions in the Eurozone, the UK and Latin America, all of which are expected to produce real GDP growth of less than 1%, lagging behind the rest of the world.

Canada, where consumer spending is getting hammered by the dual blows of mortgage payment hikes and persistent inflation, is also weathering economic struggles. Meanwhile, Asia Pacific, the Middle East and Africa are forecasted to lead the world’s real GDP growth this year, with the United States close behind. Surprising resilience in the U.S. economy played a major role in the better-than-expected global growth results for 2023.

Oxford’s analysis also shows that:

• Although inflation has fallen substantially from the historic highs of 2022 and early 2023, interest rate reductions are expected to be gradual, beginning around the middle of 2024.
• Real export growth (excluding oil) is expected to be tepid in the United States, China, Japan and the UK this year as global trade will remain sluggish.
• Industrial production is expected to outpace broader economic growth in 2024 as it catches up with the wider economy after lagging in 2022 and 2023.

The Oxford forecast mirrored the sentiments expressed by U.S. finance leaders in Grant Thornton’s CFO survey for the fourth quarter of 2023. In that survey, CFOs expressed surging confidence in supply chain functions, cost controls and meeting labor needs at a time when stock markets in the United States were also experiencing an upswing.

As economies build on that confidence, Harrison said growth will be stronger in the second half of 2024, with inflation continuing to decrease and interest rate cuts beginning. He expects inflation to fall back toward target rates of approximately 2% around the end of 2024.

“It will take interest rates longer to come back down toward previous low levels,” he said. “Central banks will exert quite a bit of caution, but still, it’s positive that we think interest rates have now peaked and will come down sooner than we had predicted six months ago.”

An upbeat outlook

Oxford data shows that labor markets remain tight, particularly in advanced economies, with low unemployment and large numbers of job openings. But Harrison said wage growth pressures should ease as general inflation numbers continue to fall.

The fairly strong predictions for the world economy come with a few caveats. First, if interest rate reductions don’t commence, a lengthy period of high rates could put a freeze on credit and spark several years of meager growth. Second, escalated tensions in the Middle East or between China and Taiwan could trigger consequences ranging from an oil price spike to trade and technological barriers against China that could have serious global economic consequences.

Conflict in the Middle East already is causing uncertainty in the oil price outlook and an uptick in freight rates as attacks on commercial vessels in the popular Red Sea corridor through the Suez Canal have disrupted shipping. An Oxford chart shows that an alternate route — around the Cape of Good Hope on the southern tip of Africa — can take up to two weeks longer for a typical shipping journey from Shanghai to Rotterdam.

Nonetheless, Oxford predicts that the Red Sea attacks are unlikely to severely disrupt efforts to curb inflation in Europe. And globally, Oxford’s outlook for growth is optimistic, particularly for the second half of the year.

“Generally, it’s quite an upbeat outlook for 2024,” Harrison said, “much stronger than anybody predicted before.”