This year 2022 and next year 2023 are difficult years for the world economy. According to the last “Global Economic Outlook” published by the IMF in October, “the global growth forecast of 3.2% in 2022 and 2.7% in 2023 is far below average: global economic growth averaged 3.6% during 2000-21 (and the same during 1970-2021)” . As can be seen in the Table 1 below, the reason for the slowdown is that the three biggest economies in the world, United States, China, and the Euro area are growing much less than before, and especially the next year 2023 will very challenging as, according to other estimates, that year growth in United States and the Euro area could be very low or near 0%. In this report, an analysis of the state of the world and the United States economy and measures to deal with the challenges ahead will be given.

1. The state of the World and the United States economy and what lies
ahead
This year 2022 and next year 2023 are difficult years for the world
economy. According to the last “Global Economic Outlook” published by
the IMF in October, “the global growth forecast of 3.2% in 2022 and 2.7%
in 2023 is far below average: global economic growth averaged 3.6%
during 2000-21 (and the same during 1970-2021)”1
.
As can be seen in the Table 1 below, the reason for the slowdown is that
the three biggest economies in the world, United States, China, and the
Euro area are growing much less than before, and especially the next year
2023 will very challenging as, according to other estimates, that year
growth in United States and the Euro area could be very low or near 0%.
In this report, an analysis of the state of the world and the United States
economy and measures to deal with the challenges ahead will be given.
I. State of the world economy
After beginning to recover from the COVID 19 pandemics in 2021 the
world economy posted a robust growth of 6.0% that year. But at the end
of that year there were already signs that the year 2022 would not see
another year of rapid growth. Some of these reasons were: First, the
growing geopolitical tensions in Europe that resulted in the war in Ukraine
from February 2022; Second, the increase in the price of food and energy
due to the strong recovery the world economy was experiencing was
causing inflation; third, the coming increase in the cost of capital due to
the increase in interest rates that governments were announcing to fight
inflation; and fourth, because of the withdrawal of the fiscal and monetary
stimulus that governments implemented in 2020 and even 2021.
1
See IMF, Global Economic Outlook, October 2022, page 8

2. Table 1. Overview of the world economy
Source: IMF, Global Economic Outlook, October 2022
In the year 2022 the war in Ukraine brought more increases in prices of
energy, petroleum oil and natural gas, and food, to an extent not seen in
many years. This pushed inflation rates to levels not seen in the world,
especially in Western Europe and United States, in forty, or fifty years,
when in the 1970s occurred the two big oil shocks.
To fight inflation, Central Banks all over the world, except for China and
Japan, began rising its rates, and United States was the more aggressive in
this measure. In Table 2 we can for example see how this happened in
countries in Asia and others (data until October 20, 2022). In United States
the Federal Reserve have kept increasing its rate, the last one on
December 14, 2022, to a range of 4.25-4.50. Se Graph 1.
Table 2. Evolution of interest rates in Asia and other countries

3. Source: Nikkei Asia https://asia.nikkei.com/Economy/Indonesia-hikes-key-interest-rate-to-4.75-highest-
in-over-2-years, October 20, 2022
Graph 1. Increases in Fed rates
Source: https://www.washingtonpost.com/business/2022/12/14/fed-rate-hike-december/ December
14, 2022
The high inflation rates depressed consumption, but also bottlenecks in
the world economy contributed to the slow growth. But also, for the year

4. 2023 one estimate projects that the United States and the Euro area could
see minimal or no growth at all. See Table 3. One good thing is that
inflation rates could sharply come down.
Table 3.
Source: ADB “Asia Development Outlook”, Supplement, December 2022
https://www.adb.org/sites/default/files/publication/844296/ado-supplement-december-2022.pdf
In the other hand, the Zero COVID policy in China led to frequent
disruption in its economy, and this weighted down in global production.
As China has been the main engine of the world economy from the
beginning of this century, a slowdown in its growth affects the whole
world. Growth in China could slowdown to 3% this year 2022 according to
the Asia Development Bank estimate, much lower than the 5.5% figure
that Premier Li Keqiang project in March this year. See Table 4.

5. Table 4.
Source: ADB “Asia Development Outlook”, Supplement, December 2022
https://www.adb.org/sites/default/files/publication/844296/ado-supplement-december-2022.pdf
But China recently eliminated its zero covid policy and there are
expectations that its 2023 annual economic growth rate would be higher
than what is estimated.
What must happen to improve the growth prospects of the world
economy in 2023 and beyond? First, as inflation recedes, Central Banks
could stop increasing its rates and even lower them, so improving the
appetite for corporate investment and global consumption; Second, even
if peace could not be achieved in 2023 in Ukraine, at least an escalation in
the war should be avoided so not to see again increases in prices of
petroleum oil and some food like wheat; Third, the trade and economic
competition (war) that United States is waging against China should not
escalate because this could disrupt global supply chains and curtail
production in some goods and sectors.
II. State of the United States economy
As said before United States moved aggressively to curtail inflation due to
soaring prices of energy and food, but also due to a tightening labour

6. market. Unemployment rate is historically in low levels, at 3.6%, and this
was pushing up production costs. The Federal Reserve increased its rates
beginning from March 2022 from a level of 0.00-0.25 to 0.25-0.50 and the
last hike was on December 15, 2022, to a level of 4.25-4.50, at the fastest
pace in the last four decades. See Graph 2 below.
Graph 2. Increases in Fed rates in the last forty years
Source: https://www.statista.com/chart/28437/interest-rate-hikes-in-past-tightening-cycles/ December
14, 2022
The Fed will raise its rate to the range of 5.00-5.25 in 2023 and this rate
would be maintained at that range for some time according to one
estimate. See Table 5 below. According to this analysis, inflation rate will
not come down significatively until 2024, among other things, because the
labour market will continue tight. And the economy will avoid recession in
2023 but annual growth rate that year and in the next ones will be below
2%, at least until 2027.
Table 5. Indicators of the United States economy

7. Source: Deloitte Insights, United States Economic Forecast, December 20, 2022
https://www2.deloitte.com/us/en/insights/economy/us-economic-forecast/united-states-
outlook-analysis.html
But for a mature economy like United States, growing at a rate between
1.5% to 2.0% is nothing bad, especially compared with the Euro area and
Japan. The United States economy strongest points compared with those
economies, and to China, is for example that its working-age population
will continue growing (among other things because is able to attract young
immigrants) and because it spends the most in research and development.

8. United States will continue be an innovative economy, especially now that
the Biden government is going to spend around 280 billion dollars to
promote more investment in R&D and related activities, thanks to The
CHIPS and Science Act, which includes fifty-eight billion dollars in subsides
to bolster its production of semiconductors2
. Also, the war in Ukraine will
increase its military spending and this could bolster its military-industry
complex with the positive spill over effects in the whole economy.
In summary, the world economy faces risks, as the continuation of the war
in Ukraine, the slowdown of the United States and Euro area economies,
and the intensifying of the economic competition between United States
and China. All that bodes not well to developing economies that are
dependent in the continuous growth of United States, and especially, of
the China economy.
December 29, 2022
2
McKinsey & Company: The CHIPS and Science Act: Here´s what´s in it, October 4, 2022
https://www.mckinsey.com/industries/public-and-social-sector/our-insights/the-chips-and-science-act-
heres-whats-in-it