It’s a messy picture out there, with data pointing to an uncertain global economic outlook this year. There are plenty of positives, such as strong growth in services, GDP growth in several surveyed economies, and stability across multiple indicators, including unemployment. However, this is juxtaposed with a subdued manufacturing environment, a decline in global trade flows, renewed uncertainties about supply chains (especially concerns over shipping via both the Red Sea and the Panama Canal), and lingering inflation.
The January 2024 World Economic Outlook Update from the International Monetary Fund (IMF) describes the global economy as “surprisingly resilient” in a modest upgrade to its October projections: growth is now projected at 3.1% in 2024 and 3.2% in 2025. The IMF attributes this to “resilience in the United States and several large emerging markets and developing economies, as well as fiscal support in China.” The IMF’s upbeat analysis describes the global economy as beginning its “final descent” toward a soft landing, with inflation steadily declining and growth holding up.
Meanwhile, although OECD composite leading indicators point toward a rebound across most developed and emerging economies (with China and the UK as the biggest “rebounders”), consumer confidence looks to be trending down across surveyed economies—although there has been no data since November’s OECD data indicated a decline in consumer confidence across most surveyed economies. That said, the US ended the year with upbeat consumer sentiment: the Conference Board’s Consumer Confidence Index rose in December to 110.7, reflecting more-positive ratings of current business conditions and job availability, and less-pessimistic views of personal income prospects.
Russia and China stand out with rebounding retail sales growth against a landscape in which retail sales remained relatively stable across most surveyed countries. China’s 2023 retail sales growth improved significantly to 7.2%, up from –0.2% in 2022. Sales of consumer goods expanded by 5.8% (0.5% in 2022), and food service sales saw a more notable increase of 20.4% in 2023 (–6.3% in 2022). In the US, retail and food service sales increased to $709.9 billion, a 0.6% rise from November’s $706.0 billion. Monetary tightening in Russia will cause household demand to cool, likely weighing on growth going forward.
Inflation’s downward trend has faltered in advanced economies (Exhibit 1). In the US, the Consumer Price Index (CPI) rose by 3.4% (annualized) in December (3.1% in November), while core inflation edged down to 3.9% (annualized) in December (4.0% in November). Eurozone headline inflation rose to 2.9% year over year in December, up from 2.4% in November, as winter arrived; other than energy, there was a mild reduction across all components. An uptick in the UK CPI was a major surprise, with a rise to 4.0% in December from 3.9% in November; core inflation was also unexpectedly unchanged at 5.1%, while services inflation edged up to 6.2% (from 6.1%).
It was a similar story in some emerging economies. India’s headline inflation rose to 5.7% in December from 5.6% in November, while Russia saw headline inflation soar to 7.5% in November before easing slightly to 7.4% in December. By contrast, China is battling deflation, with consumer prices contracting –0.3% in December and producer prices deflating by –2.7%. Meanwhile, inflation in Brazil fell for the third consecutive month, down slightly to 4.6% (4.7% in November).
Commodity prices are at similar levels to what they were after the financial crisis. Energy prices are maintaining high levels after peaking in 2022, and metals prices are stable after a period of high inflation in 2022. Food prices are trending down, although they remain comparable to the 2011 period of high inflation.
Looking ahead, inflation expectations have stabilized between 2.0% and 2.3% for both the medium and long term.
Interest rates held steady across developed economies and in India. Brazil reduced the Selic rate in December by 0.50 percentage points, from 12.25% to 11.75% per annum, and is anticipating further reductions.
In the US, initial estimates indicate real GDP growth of 2.5% for 2023—beating almost all expectations (Exhibit 2). January 2024 settled in with upbeat consumer sentiment, inflation at 3.4%, and a growing equity market. US GDP growth in the fourth quarter of 2023 was 3.1% year over year and 3.3% in terms of the annualized quarter-over-quarter rate. Previous economic projections had expected the US to grow by 2.0% in 2023, with the Federal Reserve projecting the highest figure at 2.6%, outpacing economic performance in Europe.1 The main contributor to the eurozone’s third-quarter 2023 contraction (–0.1% quarter over quarter) was a change in inventories by companies hedging strategies to weather the expected slowdown. Real GDP fell by 0.2% in the UK over the three months to November 2023, compared with the three months to August.
A somewhat more positive GDP story saw China reporting growth of 5.2% in 2023 to reach $17.7 trillion, with consumption contributing more than 80.0% of the growth. India, meanwhile, is targeting growth of 7% in 2024–25. Russia’s wartime economy is estimated to see a rebound in economic activity for the whole year of about 2.7% to 3.0%. Better-than-expected performance was most likely driven by the resilience of domestic demand, stimulated by government spending and wage growth prompted by labor shortages.
Manufacturing and services continue their divergent paths: the global purchasing managers’ index (PMI) for manufacturing indicated contraction for the 16th successive month (ticking down to 49.0 in December from 49.3 in November), whereas the comparable index for services indicates that services expansion has maintained momentum at 51.6. Looking at manufacturing on a country and regional level, we see that India (54.9 in December) and Russia (54.6) stood out in terms of manufacturing PMI performance, while China remained steady (50.8 in December) and other surveyed countries were lackluster. The US manufacturing PMI for December was revised down to 47.9 from a preliminary 48.2 (49.4 in November), while the industrial production index remained almost unchanged at 102.5 (November 102.4). The industrial production index for the eurozone fell in November (–0.3% month over month and –6.4% year over year) after also dropping the prior month.
On a brighter note, all surveyed economies saw their services PMIs in the expansion zone, except for the eurozone, which improved marginally to 48.8 in December. Notable for their strong growth were India (59.0 in December), Russia (56.2), and the UK (53.4). The US services PMI increased to 51.4.
Unemployment remains either steady or on a downward trend. US unemployment in December was unchanged at 3.7% (3.5% in January 2020). The UK unemployment rate for August to October 2023 was largely unchanged from the previous quarter at 4.2%. China’s surveyed urban unemployment rate was reported at 5.2% in December 2023, down 0.4 percentage points since 2022. The adjusted youth unemployment rate, which excludes students, stood at 14.9% in December 2023. India’s unemployment rate fell to 8.7% in December from 9.2% in November. Brazil’s three-month moving average unemployment measure continued downward to 7.5% in November (7.6% in October), its lowest since 2015. Russia’s unemployment rate was stable at a record-low level, below 3%.
The US, India, and Brazil were the standouts on the equity markets. In December, the S&P 500 was up 4.4%, bringing its one-year return to 24.2%; the Dow Jones rose 4.8% for the month and was up 13.7% in 2023. In India, both the Nifty and the Sensex rose: the Nifty had climbed 3.2% and the Sensex 2.7% as of January 22, 2024 (compared with December 12, 2023). In December, Brazil’s Bovespa equities index added 3.1% in value.
For November, exports fell in Russia and the US but were up in China; imports decreased in China and the US. US exports were $253.7 billion in November, $4.8 billion lower than October, and November imports reached $316.9 billion, down $6.1 billion from October. November’s Container Throughput Index registered a continued fall for northern Europe, alongside a slight weakening for China, but the overall index was up to 124.5, from 123.7 (revised) the previous month.
Currently, world trade is largely being driven by imports in emerging economies. China’s overall trade fell by –5.0% in 2023 (+4.3% in 2022), with exports contracting –4.6% (+6.9% in 2022) and imports declining –5.5% (+1.0% in 2022).
It’s no secret that global trade patterns are reconfiguring. Our monthly Global Economics Intelligence reports have addressed this trend, and a new McKinsey Global Institute report, Geopolitics and the geometry of global trade, explores it in depth. While trade between economies that are relatively unaligned in geopolitical terms accounts for only about 20% of global goods trade, it is focused on goods such as laptops and iron ore, for which only a few (three or fewer) economies provide 90% of global exports or more. In the case of these “globally concentrated products,” some 40% of the trade is between so-called geopolitically distant economies.
How will this affect global trade in an era of global sanctions, geopolitical instability, and carbon reduction as economies decouple, derisk, and engage in “friendshoring”? The report explores two types of reconfiguration: in the first, trade between economies shifts to more geopolitically aligned partners, such that average trade concentration increases by 13% and economic growth suffers; in the second scenario, trade relationships diversify, leading the geopolitical distance of trade to increase by 3%. In response, business leaders can look to position their organizations for uncertainty, such as by cultivating an insights edge, anticipating and adapting with scenario planning, developing a portfolio of strategic actions, and building geopolitical muscle. Businesses can also contribute to the discourse on the evolution of global connections.
In advanced economies, US consumer sentiment is upbeat, and stocks are buoyant; US growth eclipses Europe’s performance; central banks resist rate cuts in a bid to tame lingering inflation.
United States. US GDP growth in fourth quarter 2023 was 3.1% year over year and 3.3% in terms of the annualized quarter-over-quarter rate. Earlier economic projections had anticipated 2% US GDP growth in 2023.
Eurozone. The main contributor to the eurozone’s third-quarter contraction (– 0.1% quarter over quarter) was a change in inventories by companies hedging strategies to weather the expected slowdown. Private consumption, however, made a positive contribution, the highest in 2023. The eurozone economy is expected to recover thanks to rising real incomes as people benefit from falling inflation, growing nominal wages, and improving foreign demand. However, there are downside risks stemming from member states’ budget constraints and issues in the housing sector.
United Kingdom. The UK Consumer Price Index unexpectedly rose to 4.0% in December from 3.9% in November, with the largest upward contributions coming from tobacco (because of higher taxes) and alcohol. Core inflation, which excludes items such as energy, food, alcohol, and tobacco, was unexpectedly unchanged at 5.1%, and services inflation increased from 6.1% to 6.2%. The uptick was a major surprise: analysts had anticipated a fall in the CPI to 3.7%.
In emerging economies, consumption drives growth in China as exports weaken and real estate contraction endures; India looks to achieve 7% growth in 2024–25; weak external demand, tight credit conditions, and lower oil receipts are key 2024 challenges for Russia.
China. In 2023, China’s GDP recorded growth of 5.2% (3.0% in 2022), reaching $17.7 trillion. The rate of growth was slightly above the government’s target of 5.0% but below prepandemic levels (6.0% GDP growth in 2019). Consumption was the primary driver, contributing 82.5% to GDP growth, followed by investment at 28.9%, and trade at –11.4%. Forecasts of GDP growth for 2024 range from 4.4% (UBS and Oxford Economics) to 4.6% (Fitch Ratings). The housing sector continued to contract in 2023: real estate investment fell –8.1%, floor space started was down –20.9%, sales revenue of housing property decreased –6.0%, and floor space sold sank –8.2%.
India. The PMI for manufacturing moderated to 54.9 in December 2023 from 56.0 in the prior month, which can be attributed to a slowdown in new orders, output, and employment. By contrast, the services PMI reached a three-month high of 59.0 in December, supported by new business and employment. The services sector accounts for more than 50% of India’s GDP.
Brazil. Inflation fell for the third consecutive month, down slightly to 4.62% (4.68% in November) and below the upper limit of the Central Bank’s target inflation range (4.75%) for the second consecutive month. However, food prices have risen; food inflation was up 1.02% in December 2023 versus the same month the previous year. Harvests in key agricultural areas have been disrupted by heavy storms attributed to the effects of the El Niño weather phenomenon, raising the cost of staples such as rice and potatoes. The Central Bank’s Monetary Policy Committee decided, for the fourth time, to reduce the Selic rate by 0.50 percentage points, from 12.25% to 11.75% per annum, to reach the lowest rate since March 2022.
Russia. Recent projections for 2024 assume GDP slowing to a wide range of between 1.7% and 2.7%, reflecting high uncertainty. Key challenges include weak external demand, tight credit conditions, and lower oil receipts. Government spending, with military spending at 6% of GDP in the new budget, is expected to drive growth this year. Monetary tightening will cause household demand to cool, likely weighing on growth. That said, the 18.5% minimum wage hike in January will have an impact.
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