Global Developments in 2023

The global economy continued to experience considerable challenges and macroeconomic divergences. While remaining resilient, global economic growth momentum has moderated and is uneven across countries and regions amid the ongoing impact of tighter global monetary conditions, persistent underlying inflationary pressures, as well as heightened geopolitical uncertainty and geoeconomic fragmentation. Despite easing inflationary trends, core price pressures remain elevated, prompting major central banks to reaffirm their commitment to containing inflation until it falls durably within the target range.

Although moderating in momentum, global growth surpassed initial expectations as optimism arose from developments such as a stronger-than-expected United States (US) economy, an easing energy crisis in Europe, and China’s economic reopening post-pandemic. Despite an ongoing contraction in manufacturing activities – reflecting weaker global demand conditions – services activity remained resilient, alongside historically tight labour markets. Swift policy action by the US and European authorities also served to restore market confidence after banking turmoil earlier in the year, given the impact of tighter financing conditions.

Meanwhile, China’s economic growth showed signs of early recovery following its exit from zero-COVID policies, but momentum dwindled, hampered by ongoing stress in the real estate market, growing corporate debt risks and weakening confidence, which continues to weigh on global economic activity. The International Monetary Fund (IMF) in its World Economic Outlook report in October 2023 forecasts global growth to slow to 3% in 2023 from 3.5% in 2022, with growing regional divergences. However, Asia Pacific is expected to remain as a global growth driver, with the IMF forecasting growth in the region to accelerate to 4.6% in 2023, from 3.9% in 2022.

chart 1

Both global and Malaysian financial stress levels moderated in 2023, reflecting a shift in expectations that major central banks are approaching the peak of their tightening cycle, especially towards the end of the year

OFR Global Financial Stress Index (FSI) and Malaysia
Note: The Global FSI is from the Office of Financial Research, US Department of Treasury, while the Malaysia Financial Stress Index (MFSI) is internally estimated following
similar methodology (see Monin, 2017). Value of FSI above zero indicates higher than historical average financial stress in the economy.
Source: US Office of Financial Research, the SC’s internal estimates.

Global financial markets performance ended 2023 on a high note, despite the constant shifts in investor sentiments amid heightened global economic uncertainty. Disinflation progress in major economies also continued to influence expectations surrounding the path of global monetary policy, which resulted in volatility in global financial markets throughout the year. The overall level of global financial stress increased in March 2023 amid banking system stress in the US and Europe, but subsequently eased towards the end of the year following a shift in expectations that global interest rates are nearing their peak (Chart 1).

In the global equity markets, the MSCI World Index rose by 21.8% in 2023, while the MSCI Emerging Markets Index trailed the global benchmark by rising 7.0%, partly reflecting concerns from China’s subdued economic recovery. Meanwhile, global bond indices improved, particularly in the latter part of 2023, driven by dovish shift in monetary policy expectations amid the gradual easing in global inflationary pressures (Chart 2).


Global equities and bonds performances improved in 2023

Source: Refinitiv Eikon Datastream; the SC’s calculations.
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