Global economy adjusts to new reality

13 September 2023

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

The global economy has a way of surprising even the experts. At the start of the year, many economists had been predicting a recession for 2023. The thinking was that economies would grind to a halt, faced with the stifling combination of runaway inflation and the cranking-up of interest rates to counter the threat. This was to be compounded by geopolitical tensions and a simmering energy crisis.

But despite these challenges, the economy may yet escape recession both this year and next – thanks, in large part, to stronger-than-expected consumer spending, buoyant labour markets and a post-COVID services sector rebound. That said, some economies are holding up better than others.

US sends mixed signals

American households have embarked on something akin to a spending spree this year – dipping into excess savings built up during the pandemic, as well as being supported by strong employment and pay growth.

Buoyed by the consumer, recession fears have fallen, for now at least. The US economy grew at a faster-than-expected 2.4% during the second quarter, defying expectations it would slow markedly.

But current levels of consumer spending appear unsustainable. Excess savings are now estimated to be around $530 billion, falling from a pandemic-era peak of $2 trillion1. This shrinking cash pile may yet scupper any soft-landing hopes for the US economy.

The broader economic picture remains mixed. Weak manufacturing data2 is adding pressure to the economy, with manufacturers struggling to find workers and labour costs rising. Normally in such a scenario, the government would provide significant stimulus, but faced with high debt levels, a growing number of retirees and the spiralling costs of meeting climate change goals, help is unlikely to be forthcoming. 

On a more positive note, inflation is easing. The consumer price index (CPI) for July was just 3.2% year-on-year3 – higher than the long-term US Federal Reserve (Fed) target of 2%, but much more palatable than the CPI peak last June of 9.1%.   

And while the Fed has quickly raised interest rates to a range of 5.25-5.5%, the highest level in more than two decades4, the central bank is now adopting a more “hawkish” tone – with another quarter-point hike expected in November, before a pause on rates and eventually cutting them, probably from the second half of 2024. 

It’s now anticipated that the US economy will grow at 2.2% this year, and just 0.5% in 2024.

Worries mount over China

After COVID-19 restrictions were finally relaxed towards the end of 2022, a sharp economic rebound was expected this year. However, the pace of growth has lagged somewhat.

And while its economy grew 6.3% year-on-year in the second quarter, this is still below pre-pandemic levels of growth. Consumption, investment and production have all weakened since June. A crisis in the property market is also rippling through the economy. While its labour market has also stalled, credit growth has hit a record low and deflation has returned. 

In response, the People’s Bank of China has cut interest rates and is trying to encourage banks to lend more. It’s unlikely China will get close to its 5% growth target for some time to come – economic expansion of 4.5% in 2023, and 4% in 2024, would not be a surprise. 

Europe not out of the woods yet

After falling into a technical recession (two consecutive quarters of shrinking economic output) at the start of the year, the eurozone economy returned to growth in the second quarter of 2023.

Nevertheless, growth is expected to weaken as the year continues and through 2024 with consumer demand slowing and investment withering. This, despite inflation easing to 5.3% in July, compared to a peak of 10.7% in October 2022. 

The European Central Bank (ECB) lifted interest rates to 3.75% in July but is now expected to keep rates on hold until the middle of next year, before any plans to cut rates. The ECB now sees inflation falling to near its 2% target by the end of 2024. However, Europe still faces significant challenges in the meantime, and even a further mild recession, with anaemic growth of around 0.5% for this year, and 0.6% in 2024 forecast. 

UK faces tougher time than most

The UK economy may have grown 0.2% in the second quarter, but lingering inflation of 6.7% (the highest among its advanced-economy counterparts) adds to a lacklustre situation. 

Growth is expected to be just 0.5% this year and a similar 0.6% in 2024, which is also set to be a general election year. One of the reasons for the stunted growth is the effects of surging pay awards, which are hurting corporate profits and fuelling inflation expectations. And while there are fears that these pay awards could lead to a wage-price spiral, they are at least easing some of the cost-of-living concerns many Britons are facing.

To bring inflation under control, the Bank of England (BoE) is expected to again raise interest rates in September – they currently stand at 5.25%, the highest level seen since February 2008, after 14 consecutive monthly increases. The BoE has indicated that even more rate hikes may be needed, but there is a chance – subject to forthcoming economic data – that 5.5% may indeed be the final peak and that the UK central bank could cut rates by a percentage point in the second half of 2024. 

Global growth to remain sub-par

The world is slowly adjusting to a new reality – higher interest rates, a disappointing Chinese recovery and yet-more geopolitical tension.

Despite encouraging developments in the US, forecasted global growth is just 2.7% for this year, and 2.4% in 2024. For investors, the message remains consistent – staying invested, and being diversified, are vital over the long term.

Related articles