Things can only get better?

15 June 2023

Please note: All data referenced in this article is sourced from Bloomberg unless otherwise stated, and is accurate at the time of publishing.

What a difference six months makes. At the start of the year, the outlook for the global economy was not encouraging, as raised geopolitical tensions (such as those over events in Ukraine), high inflation levels and the promise of yet more rate hikes, lowered the mood. 

But, conditions have been calmer and economic data better than expected, though growth has been underwhelming by historical standards. 

What next?

In terms of wide-spread recession fears, they have not proved justified yet. However, it is only a matter of time, and a shallow one is anticipated in the UK and US in coming months. 

Meanwhile, the eurozone is likely to avoid a prolonged recession. As such, developed economies face a battle to expand, being forecast to grow at 0.9% this year and only 0.2% in 2024.

The emerging world is roaring back to life, driven by India and China. Indeed, growth in the area should be enough to keep the global economy on an upward trend, even if global growth is below the long-term average, at 2.7% this year and 2.4% next.

Winning the inflation battle

Despite the generally improving economic picture, price pressures are easing at a disappointingly slow rate. That said, higher levels of inventory, looser economic restrictions and more capacity have helped to take some of the steam out of goods inflation pressures.  

The surprisingly tight labour market dynamics, in the face of weaker growth, show signs of turning in the right direction, and weakening. In turn, this is taking some of the heat out of wage rises, although European negotiated salaries may be a fly in the ointment here.

Taking everything together, the outlook appears promising, as inflation rates head back towards central bankers’ target ranges. Global consumer prices are forecast to average 3.7% in the third quarter of this year, 3.4% in the fourth quarter and 3.0% in 2024, much better than the 7.1% surge seen last year.

Peak interest rates near, but cuts appear some way off

Policymakers have more work to do to slay the inflation dragon, even if they are winning the battle. Peaks in interest rates were much worse than hoped for in January. While inflation is heading in the right direction in many economies, the hiking cycle still has further to run in the US, eurozone and UK. 

That said, once the peak in rates is reached, cuts look to be off the agenda until 2024, and even then, an easing in policy seems to be skewed towards the latter half of the year.

Impact of banking turmoil limited

Financial markets were jittery in March, as a run on some banks saw the demise of a few mid-tier regional US banks, and Credit Suisse in Switzerland. In response, bank lending standards have been tightened and regulators might yet raise capital and liquidity provisions further, which could limit loan growth. So far, the impact of events on business and consumer sentiment seems manageable. 

The combination of post-banking crisis fears and higher interest rates might still develop into a more serious credit crunch. As remote as this risk seems for now, the impact of any crisis could hit growth prospects and slow an easing in monetary policy.

On the mend?

After being hit with the highest inflation many people have seen, and the most aggressive set of interest rate hikes since the 1980s, some relief appears to be on the way for consumers. That said, activity is likely to remain depressed in many developed countries this year, as living standards continue to be squeezed, saving rates climb and the bonus from extra pandemic savings fades. 

Meanwhile, any upturn in business investment and confidence will probably be limited by the considerable economic uncertainty, juicier wages and richer borrowing costs. At the same time, government spending could be curtailed by high debt levels and constrained fiscal headroom. 

Emerging markets are the bright spot for growth prospects in the next eighteen months. Their post-pandemic boom will help to partially offset the anaemic expansion likely in the developed world. After dipping to 2.7% this year, economic growth is forecast to expand by just 2.4% in 2024. While some might be downbeat about this, the good news is that weaker price pressures and prospect of rate cuts will likely lift some of the gloom and help activity to improve next year.

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