Economic and Strategy Viewpoint – Q2 2023

The latest Economic and Strategy Viewpoint is available in full here.

• As central banks continue to raise interest rates, signs are appearing that the impact is starting to be felt. Manufacturing activity is trending downwards, especially in Europe and Asia. Meanwhile, services continue to rebound, probably as households continue to rebalance their spending patterns back to pre-pandemic norms.
• Higher interest rates, along with poor management, have contributed to the demise of three significant regional banks in the US. This has raised concerns of a repeat of the Global Financial Crisis. Lending conditions have tightened since rates began to rise, and lending growth has slowed sharply, but we do not see a systemic risk in the banking system as was the case in the GFC. The baseline forecast assumes concerns will ease.
• Similarly, the political split in Washington has raised the prospects that the US federal government may be forced into a technical default of its debt if an agreement cannot be reached to raise the debt ceiling. The baseline forecast assumes that a deal is reached in the end, but there is a risk that concerns in markets lead to heightened volatility and a sell-off in risk assets.
• The new baseline forecast has global GDP growth slowing to 2.4% this year and 1.9% in 2024. This represents an upward revision for this year, mostly driven by upgrades to the US forecast. US households have proven to be more resilient, which in turn has allowed companies to pass on more of their costs through prices increases, but has also allowed them to keep hiring, re-enforcing a robust labour market.
• The US recession has been pushed out by a quarter, and the profile for the Fed funds forecast has been raised slightly. Inflation has started to fall, but has been stickier on the back of higher services inflation.
• The forecast for the eurozone has been revised up slightly as support from stronger export markets is expected to be partially offset by higher interest rates. European inflation has also proven to be more persistent, but should fall back significantly by early 2024, allowing for rate cuts.
• The UK is now forecast to avoid a technical recession, although the economy is expected to stagnate for most of this year. Higher interest rates and fiscal tightening are expected to weigh on households and firms. Lower energy prices will help lower inflation over the forecast, but core inflation is expected to remain elevated.
• China has had a good start to the year as the recovery from zero-Covid policy continues. The rest of the emerging market economies, however, are seeing economic activity soften as the aggressive tightening in monetary policy starts to bite.

The full Viewpoint is available as a PDF here.