Analysts at Swiss Re have warned that ‘true’ GDP growth could be lower than most forecasts are predicting due to the carryover effects of last year’s growth dynamics on this year’s figures.
In 2023, the reinsurer adds that this effect should reverse for GDP growth – but should intensify for inflation.
Swiss Re forecasts real GDP growth as an annual average growth rate, but this means the rate is determined by growth dynamics in the four quarters of the previous year as well as those in the current year.
The influence of the prior-year growth trend is known as the ‘carry-over effect’, which captures how much of this year’s annual average growth is ascribable simply to fluctuations in the level of real GDP from quarter to quarter in the earlier year.
In a new report, Swiss Re notes that last year’s exceptional post-COVID growth rebound has resulted in a particularly strong positive carry-over effects for 2022, meaning GDP forecasts are higher than ‘true growth’.
However, it expects negative carry-over effects in Europe and the US in its 2023 forecasts, as recessions are anticipated in these markets this winter.
For inflation, similar to growth, the strong inflation momentum that built during 2021 meant most major economies entered 2022 with notable positive carry-over effects, largest in the US and UK.
“This year’s further inflation surge will bring even larger carry-over effects in 2023, especially in Europe,” Swiss Re analysts explained. “’True’ inflation momentum is very strong this year, but we expect it to moderate in 2023,” they added.
