Overview

• Fears around the US banking sector have eased since mid-May, with central banks’ focus returning to inflation (around 6.3% yoy in April) that remains well above target ranges. The ECB hiked in June, and while the US Fed paused, both banks are likely to increase rates in July.
• While market expectations suggest both central banks are near the peak (fully pricing in one additional increase for both), persistent inflation could drive policy rates higher, adding downside risk to our forecasts.
• Economic growth across the major advanced economies has been mixed, highlighted by the contraction in the Euro-zone over Q4 2022 and Q1 2023, while Japan saw growth recover over this period. While the fall in energy prices will help some economies (notably in Europe and Japan) the tightening in monetary policy is likely to keep growth generally subdued.
• Stronger readings for emerging market surveys in May were largely driven by China. The strength of China’s services PMI is somewhat at odds with ongoing signs of weakness in the country’s domestic demand. Softer goods demand in advanced economies will impact trade activity going forward – hitting EM growth.
• Overall, our forecast for global economic growth in 2023 is slightly higher this month – reflecting the impact of stronger than anticipated activity in India, a pushing back of the expected slowdown in US growth to H2 2023 (which negatively impacts the global outlook in 2024) and a pickup in Latin America. We expect the global economy to expand by 2.8% in 2023 (from 2.7% previously), before slowing to 2.6% in 2024 (2.7% previously). Excluding the outliers of the Global Financial Crisis and initial wave of COVID-19, this would be the slowest rate of growth since 2001. We expect a modest upturn in 2025 (to 3.1%).

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