Overview

• Volatility in financial markets (especially bonds) rose in September. While markets continued to adjust their monetary policy expectations –reflecting the competing forces of persistent inflation and deteriorating economic activity –the UK government’s mini-budget was met with a severe market reaction. Yields on 10 year UK gilts rise rapidly above 4% (the highest rates since 2008), forcing the Bank of England to intervene to safeguard pension funds and the government to reverse course on this policy.
• Global inflation remained stable at 8.7% yoy in August (unchanged since June). A range of factors –including slowing growth in producer prices, falling freight rates and food prices –point to weaker inflation in coming months, but there remain some risks, including the impact of the Russia-Ukraine conflict on European natural gas supply and disruptions due to China’s zero-COVID policies. In addition, OPEC+ has committed to cuts to oil production, which could limit downside pressure to oil prices.
• Given that inflation remains well above the targets of major central banks, these institutions have continued to increase their policy rates –with the US Federal Reserve implementing its third straight 75 bp hike in September. Despite already slowing economic activity, we expect further rate increases from major central banks in coming months –driving a weak outlook.
• We expect global growth to slow significantly in 2023, down to 2.3%, before modestly recovering to 2.8% in 2024. These increases are well below the long run average of 3.4% (from 1980 onwards). The United States and the Euro-zone are forecast to record no growth in 2023, while we expect a marginal contraction in the UK economy for the full year.
• There is considerable uncertainty around the global outlook. Due to the lagged nature of inflation data, there is a high risk of greater-than-necessary central bank policy rates, resulting in a deeper than anticipated recession in advanced economies. The Russia-Ukraine conflict has persisted, with natural gas flows to Europe restricted and ongoing concerns around grains and fertiliser supplies. China’s zero-COVID public health policies remain in place and further lockdowns could negatively impact the currently improving supply chain trends. Geo-political tensions between China and the US could also re-emerge.

For further details, please see The Forward View – Global (October 2022)