Global Economic Outlook: Doom and Gloom

After a strong rebound from the pandemic in 2021, it’s been all downhill for the global economy this year. Economic activity is being hindered as policymakers cope with the hottest inflation in decades, impairments from the Ukraine war, and China’s prolonged lockdowns. Recession fears are starting to come true. The U.S. economy contracted in the first half of 2022; Europe is likely to post a similar performance in the second half. China is struggling to tame its property sector crisis and live with COVID-19.

Strong labor markets have been a blessing for most economies but are also proving to be a curse for major central banks in their fight against persistent inflationary pressures. Policy is trying to address a cost-of-living crisis by willingly inflicting a hit to growth. Recovery from this downturn and slowdown will be gradual, unlike the V-shaped pattern seen during the pandemic.

Here are perspectives on how major economies are poised to perform this year and next.

United States

Inflation remains hot in the U.S., with the consumer price index rising 8.2% year over year in September. The greater worry is the surge in core inflation to a four-decade high, led by services including shelter. Lower energy prices have been a rare bright spot in recent months, but that may not last for long. Elevated food prices aren’t helping, either.
With inflation high and the labor market still tight, the Fed is unlikely to change course. The September Summary of Economic Projections showed a median forecast of 125 basis points in hikes before year end. That is in line with our expectations. But the risks are clearly to the upside, if inflation readings remain elevated.

Eurozone

The eurozone economy recorded a solid performance in the first half of the year. However, the effects of the Ukraine war have become more apparent. The continent’s expansion is running out of gas, as rising energy prices and weakening external demand weigh on activity. The most recent surveys of activity show an economy already in recession. While we expect a brief recession through the first quarter of 2023, there are clear downside risks to the length and severity of the contraction.
Messaging from the European Central Bank, including the minutes of the September meeting, reveal that policymakers are concerned about inflation dynamics. Inflation surged to a record high of 10% year over year in September, sealing another 75 basis point hike in October. We expect further tightening in the form of a 50 basis point hike at the December meeting, followed by a slower pace of tightening early next year.

United Kingdom

The British government, in what is being touted as the biggest U-turn in the nation’s economic history, scrapped almost all of the tax measures announced in its mini-budget three weeks ago. While investors welcomed the reversal in fiscal stance, the chaos appears to have thrown the U.K. in political turmoil The British economy grew 0.2% in the second quarter, an upward revision from the initial 0.1% decline. However, current readings point to a loss of momentum as gross domestic product declined in August. With the extra bank holiday for the funeral of Queen Elizabeth II reducing output in September, the economy likely contracted in the third quarter.
The cost-of-living crisis will continue to weigh on growth, leading to a recession lasting through early 2023. The recent bout of market volatility coupled with the still-tight job market is expected to trigger a strong 75 basis point hike from the Bank of England at the November meeting. We see the policy rate peaking at 4.00% in March 2023.

Japan

Amid a gloomy external environment, domestic demand has placed the Japanese economy on stronger footing. However, worsening terms of trade and weak external demand will weigh on the country’s vital export sector in the coming months. The steady drop in the yen’s value caused an intervention by the authorities to prop up the currency for the first time since 1998.
The Bank of Japan (BoJ) remains the only major central bank with negative policy rates. The central bank has pledged to maintain its ultra-loose monetary policy. Inflation has eluded the Japanese economy for decades, but there is greater evidence that firms are passing on higher costs to consumers. However, wages are not moving up in tandem. As a result, the BoJ is expected to stick to its guns, even under a new governor.

China

- After a dismal performance in the second quarter, the Chinese economy is regaining momentum. Domestic demand is improving as COVID restrictions ease and infections remain relatively low. Policy support, such as the reduction of the purchase tax on cars, is helping stabilize growth. But the continued commitment to a zero-COVID policy, stated at the 20th Communist Party Congress, will hold consumers back. Diverging monetary policy with the U.S. is leading to increased capital outflows, weighing on the Chinese yuan. The value of the renminbi now stands above 7 versus the dollar, an important psychological threshold.

Global Economic Outlook: Doom and Gloom

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