Overview

• Banking stress in the US and Europe has been contained by the swift actions of regulators in both regions. Financial market volatility has eased and equity markets (including bank stocks) have strengthened. In the US, use of the Federal Reserve’s funding facilities is slowly normalising and bank lending has stabilised.
• However, there is still likely to be fallout from the March 2023 banking stress, with lending standards expected to tighten further. This has contributed to a pull-back in expectations of central bank rate rises. While some further rate hikes are expected – in particular, by the ECB and the Fed – the peak of the global tightening cycle is in sight.
• Whether this ends up being the case, and how long rates are kept at elevated levels, will depend on the path for inflation. Global inflation data continue to suggest a gradual easing from the peak rates of late 2022. The lagged effects of an easing in supply chain problems and the impact of policy tightening on demand, should see inflation decline further but oil producers have moved to put a floor under oil prices and core inflation is proving sticky.
• Global GDP growth looks to have bounced higher in Q1 2023. This largely reflects the impact of China’s abandonment of zero-COVID, with China’s economy growing 2.2% q/q in Q1. The US economy is also on track to record solid growth in the quarter, while the Euro-zone and UK also set grow, helped by the unwinding of the last year’s energy price shock.
• However, China will not be able to sustain growth at its Q1 pace, and with the impact of tighter policy settings (including fiscal) still working its way through, global growth over the rest of 2023 is likely to be more subdued. We continue to anticipate that annual average global growth will step down in 2023 and 2024 – to around 2.7%. Excluding the downturns associated with the global financial crisis and COVID-19 impacted 2020, these would be the slowest rates of growth since 2001. A modest recovery is likely in 2025.

For further details, please see The Forward View Global (April 2023)