Economic and Strategy Viewpoint – Q3 2023

• Falling inflation and resilient growth have boosted expectations of a soft landing, risk assets have rallied and bond yields have risen.
• Our forecasts acknowledge the improvement in the trade-off between growth and inflation and we are no longer forecasting a recession in the US. However, given the consensus move we identify three key challenges to the continuation of the soft landing narrative.
• First, the improvement is not universal. The US and Japan are performing well, but growth momentum in Europe and China has turned negative. Manufacturing heavy economies were always going to suffer as people switched back to services in the post pandemic economy. China also faces significant challenges in its property market.
• Second, further falls in inflation will be harder to achieve as they require an easing of sticky service sector inflation. This in turn will require higher unemployment as companies focus on productivity growth to reduce costs. Thus far, the reduction in inflation reflects the unwind of higher energy and food prices alongside the fall in goods price inflation as supply chains re-opened.
• Third, there are still issues around how effective monetary policy is in the post pandemic world. We see good reasons why the time lags from central bank policy action to changes in the economy have lengthened, but still believe that monetary policy works.
• We are revising up our growth forecasts for the US this year 2.3% (previously 1.5%), but slashing the projection for China to 4.8% (from 6.5%). These moves largely cancel each other out to leave our global GDP forecast little changed at 2.5%. We expect global growth to decelerate further in 2024 to 2.1% as policy continues to bite on activity.
• Global inflation is expected to moderate from 7.2% last year to 4.4% this year and 3.1% next. Within this there is a marked divergence between the advanced economies and emerging markets with inflation cooling in the former and rising in the latter as China lifts itself out of deflation.
• Policy rates are close to their peak and will fall next year, although we have pushed out the easing cycle to reflect the challenge of beating inflation.
• The landing for the world economy is not as hard as before, but next year is still forecast to be the weakest for more than a decade (ex. the pandemic year 2020).

The full Viewpoint is available as a PDF here.