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Beware the New Consensus on the Global Economy

Despite an increasingly challenging economic and geopolitical environment, the global economy performed better than expected over the past year. But although analysts’ projections for 2023 were too pessimistic, it appears that consensus forecasts for the coming year may have have swung too far in the opposite direction.

CAMBRIDGE – In the run-up to 2023, the outlook for the global economy appeared bleak. Analysts predicted that Russia’s invasion of Ukraine and the subsequent surge in energy prices would trigger a significant economic downturn in Europe. Bloomberg Economics proclaimed that there was a 100% probability that the United States would suffer a recession. Few believed that most developing economies could withstand the combination of rising energy prices, soaring interest rates, and a downturn in developed countries.

Had forecasters anticipated the war between Israel and Hamas and its potential for regional escalation, the intensification of the Russia-Ukraine war, and political turbulence in some Western countries, their pessimism would have been even more pronounced. Moreover, the extraordinary volatility in the US Treasury market, a key benchmark for numerous domestic and international markets, would have fueled fears about a looming global recession, as would have US bank failures.

But while the past year’s unforeseen political, geopolitical, and market upheavals should have further dampened the world’s growth outlook, the global economy surprised on the upside. The vast majority of developed economies defied expectations, successfully avoiding economic contraction. Developing countries as a whole avoided financial distress. Even China, despite its disappointing growth, showcased the resilience of its economy as the year drew to a close.