Global Economy Update

Global economic activity has remained reasonably resilient so far in 2023 in the face of persistently high inflation in many developed economies, and rising interest rates. However, recent data suggest that global momentum was slowing by the middle of the year.

With headline rates of inflation now firmly on a downward path across developed markets, interest rates appear close to peaking. However, the resilience of activity and strong services inflation and wage growth have heightened central bankers' concerns around “second-round” inflation effects, particularly in Europe. Policymakers will be closely watching the dataflow in the coming months, with a risk that tightening cycles are extended further.

Lower inflation should help drive a recovery in real disposable incomes in the year ahead, but the cumulative rise in interest rates over the past 18 months will be a strong headwind for growth. Our latest forecast for the global economy (published in June) assumes that global GDP growth will slow from 3.3% in 2022 to stand at 2.6% in 2023 and 3% in 2024, marking two consecutive years of subdued global growth.

What do recent data tell us?

High frequency data have sent mixed signals over the strength of global economic recently. After seeing the strongest post-pandemic recovery in the G7, activity in the US is slowing down. In the first quarter of 2023 GDP growth slowed to 0.3% quarter on quarter, down from 0.6% in Q4, reflecting weaker capital expenditure and residential investment (likely a result of tighter financial conditions), as well as a continued unwinding of inventories.

However, there are still signs of resilience in the US economy. Despite high inflation, growth in consumer spending has been strong, supported by the tight labour market, a run-down in pandemic savings and limited direct impact from higher interest rates given the prevalence of 30-year mortgages. The US saw another solid expansion in Q2, with consumer spending still growing, confidence ticking up, and unemployment edging back down again in June. Nonetheless, survey data are sending a softer signal for the second half, with new orders in manufacturing and services pointing to weaker activity in the months ahead.

Revised data for the euro zone economy show that the region narrowly avoided a recession over the winter (despite a downturn in Germany), with growth flat in Q1 after a slight contraction in Q4 2022 (-0.1%). More recent indicators suggest growth may have been only slightly positive during Q2, however, with momentum fading again heading into the summer.

Weak industrial activity continues to weigh on the region’s economy, reflecting a softening of demand for goods post-pandemic, an ongoing stock correction, high energy costs, and a limited boost from China’s re-opening. The euro zone manufacturing PMI has remained in contraction territory (i.e., below the 50-mark) for 13 consecutive months as of July. Meanwhile, services activity, which had been holding up relatively well through the spring, has also showed signs of softening. As a result, the euro area composite PMI sank back into contraction territory in June (at 48.9, an eight-month low), with activity in the region’s two largest economies shrinking (48.3 in Germany and 46.6 in France). The Sentix and ZEW euro area surveys for July also suggest that sentiment has deteriorated this month. All this points to fading momentum through the summer as tighter financial conditions begin to bite (though services activity in Southern Europe could receive support from tourism).

A further sign that global GDP growth is slowing is provided by recent data from China, which suggested that the country’s post-reopening recovery has already lost steam. After growth of 2.2% quarter on quarter in the first quarter of 2023, the Chinese economy expanded by just 0.8% in Q2, with annual growth of 6.3% flattered by the comparison with Q2 2022 (when Shanghai and other cities were locked down) and below market expectations (of 7.3%). China’s difficulties reflect both domestic and external headwinds, with consumer confidence still historically weak, the property market sinking, industrial production softening and the value of exports (in dollar terms) down by 12% year on year in June. Additional monetary stimulus announced in June is expected to have a limited impact given weak credit demand, while global headwinds will remain as the impact of monetary tightening in developed countries continues to feed through in the second half of the year.