Q2 2023 Global Outlook: This too shall pass
Read our Research analysts’ Q2 outlook for the global economy, exploring the fallout following recent banking turbulence.
SOLUTIONS
INSIGHTS
NEWS AND EVENTS
RESEARCH | 3 POINT PERSPECTIVE | MACRO SHIFTS
Contributors: Ajay Rajadhyaksha & Amrut Nashikkar
22 Jun 2023
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China’s recovery has disappointed greatly in the second quarter. Our analysts do expect a mild bounce in the second half of 2023, as policy easing kicks in. But they have lowered their full-year GDP growth forecast for China to 5.3%. The euro area is already in a technical recession, and the rest of the year should see stagnant growth.
In the US, the picture is brighter. The economy has largely shrugged off the March banking crisis and all indications are of growth near trend. Activity should slow eventually as the Federal Reserve tightens further. But with companies and households in excellent shape, our analysts expect only a mild US contraction.
All in, the team’s growth forecast for 2023 has not changed much since the Q2 Global Outlook; with the world economy expected to grow 2.7% this year, a step down from 3.3% in 2022. But the regional patterns have shifted significantly.
Read our Research analysts’ Q2 outlook for the global economy, exploring the fallout following recent banking turbulence.
Major central banks have repeatedly had to revise up their forecasts for inflation, and both the Fed and the ECB did so again this month. Our analysts expect inflation to head lower in both regions, but core inflation should stay uncomfortably high – around 3.5-4% – entering 2024. Even in Japan, inflation is widespread enough that an exit from the central bank’s ultra-easy policy is looming.
Recent surprise interest-rate hikes by the Bank of Canada and the Reserve Bank of Australia are warning signs, in that context. Investors expecting central banks to make a quick pivot to easing cycles are likely to be disappointed.
A sense of American exceptionalism has been reflected in US stock markets, where the S&P500 index led global equities into a new bull market in early June. Some of that move is being driven by excitement over machine learning and AI, with mega-cap tech stocks the beneficiaries. But our analysts are skeptical of the idea that productivity will suddenly surge. History tells us that it takes many years, if not decades, for technological breakthroughs to affect productivity at an economy-wide level.
That means that central banks are going to have to solve the challenge of sticky prices and high wages the old-fashioned way: by staying in restrictive territory for much of the next few quarters. That is one reason why our analysts are not enthusiastic on risk assets: with cash yielding above 5%, it should be hard for equities to rally further from elevated levels. Meanwhile, they find it hard to recommend bonds, with inflation persistent. Major assets are likely to trade in a range.
About the experts
Ajay Rajadhyaksha
Global Chairman of Research
Amrut Nashikkar
Managing Director, Fixed Income Strategy