Half Yearly Economic Outlook_July23

The global economy is facing a number of challenges in 2023, including geopolitical tensions, inflation, and tightening financial conditions. However, economic activity remains resilient, thanks to strong consumer spending, positive labor market dynamics, and China’s reopening. Advanced economies are expected to experience limited growth of 0.9% in 2023, but the global GDP growth forecast is raised to 2.7% due to the recovery in China and India, which are expected to grow by 5.3% and 6.2% respectively. However, there are concerns about fading reopening effects and fiscal headwinds that may impact global growth in 2024.

Inflation is expected to gradually ease towards central bank targets over the next 12-18 months, with global consumer prices projected to average 3.7% in Q3 2023, 3.4% in Q4, and 3.0% in 2024. Strong labor markets and slower-than-expected inflation easing have led to higher interest rates, and major central banks are anticipated to continue the hiking cycle in the second half of 2023. However, a shift towards an easing stance is expected in 2024, as disinflation provides a potential silver lining.

In the United States, most forecasts indicate that the economy will avoid a downturn in 2023, with upgraded growth outlooks ranging from 1.2% to 1.8%. However, a mild recession is likely in the second half of 2024. Consumer spending and the labor market have shown resilience in the first half of 2023, suggesting that the slowdown may not be as immediate or severe as predicted. Headline inflation is expected to have peaked, with CPI forecasts for 2023 lowered to 4% due to lower energy prices. Core inflation remains resilient, leading to a raised CPI forecast of 2.7% for 2024. The Federal Reserve is expected to implement two more 25 basis points rate hikes by the end of the year, bringing the target range to 5.5%-5.75%. Turmoil in the regional banking sector and higher interest rates will lead to tighter credit conditions, impacting growth prospects in the US.

In the European Union, Eurozone growth is expected to be slow but positive over the next two years. The European Central Bank (ECB) will tighten policy to control inflation. Southern European economies continue to grow, while Germany and the Eurozone have experienced a technical recession. Growth forecasts for 2023 have been revised down to 0.6%, with 2024 forecasted at 1%. Inflation forecasts have been lowered to 5.5% for 2023 due to improving energy conditions and a weaker growth environment. However, strong wage-driven services inflation prompts an upgrade to the 2024 forecast of 2.6%. The ECB has hiked rates by 25 basis points and is expected to continue raising rates later in the year. Eurozone inflation remains stubbornly high, with headline inflation at 7% in April. Eurozone household consumption is weak due to higher borrowing costs and persistent inflation, leading to a slump in retail sales and weak industrial production.

The United Kingdom has seen resilient global growth, lower energy prices, and fiscal support. However, aggressive rate hikes, squeezed consumer spending power, and medium-term fiscal tightening have impacted the economy. The UK is expected to see a slight increase of 0.1% in GDP this year, avoiding a recession, and a tepid recovery of 0.4% in 2024. UK inflation remains high compared to other advanced economies, with CPI at 8.7% in April. The Bank of England predicts a prolonged period of elevated inflation, with CPI not reaching the 2% target until early 2025. The MPC has been consistently raising interest rates, reaching 4.5% in May, with expectations of further rate hikes. China’s GDP is forecasted to grow at a rate of 5.3-5.6% in 2023 and 5.4% in 2024. The post-COVID consumption recovery is gaining momentum, but challenges and unbalanced activity persist. Falling industrial margins and the housing sector act as drags on the consumption-led recovery.

In the equities market, despite the banking sector crisis, equities have performed well in 2023. Lower market rates have helped offset weaker corporate earnings, but increased uncertainty is likely to impact the equity rally. Companies with strong quality credentials are expected to be rewarded. Over the long term, stocks are expected to outperform bonds significantly. In the fixed income market, bond investors have an opportunity to diversify and earn high income. Government bonds and interest rate duration, especially in the US, are becoming more attractive, while caution is advised in the euro zone and the UK.

In alternative investing and private credit, private credit is experiencing a capital shortage as banks reduce lending. Qualified investors could earn equity-like returns in selected debt securities, such as loans for private equity buy-outs, lending to later-stage venture companies, and mezzanine debt for real estate refinancing. A credit collapse is not anticipated, and potential credit issues are expected to be concentrated in commercial real estate.

In summary, the global economy is facing challenges from geopolitical tensions, inflation, and tightening financial conditions. However, there are signs of resilience in economic activity, supported by consumer spending and labour market dynamics. China’s recovery and India’s strong growth are contributing to the global GDP growth forecast. Inflation is expected to gradually ease, but higher interest rates are likely in the near term. The US, EU, UK, and China each have their own economic outlooks, with varying levels of growth and inflation forecasts. Equities have performed well, but increased uncertainty may impact future performance. Bond investors have opportunities for diversification and higher returns, while private credit is experiencing a capital shortage but offers potential for qualified investors.


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J.P. Morgan https://lnkd.in/emNW5tZT

Morgan Stanley https://lnkd.in/eTWzrj3B

Barclays https://lnkd.in/ekWHv_-x

HSBC https://lnkd.in/eWv4eDuU

Citi https://lnkd.in/eVjnGg4K

Amundi https://lnkd.in/eHMEB53a

KKR https://lnkd.in/es8aFir6

Wells Fargo https://lnkd.in/eXhvxEUx

State Street https://lnkd.in/ei8zyWMR

M&G plc https://lnkd.in/eaH_f5xc

Allianz https://lnkd.in/e5pPTNB2

Wellington Management https://lnkd.in/etSSFD2H

Capital Group https://lnkd.in/esfpGZnP

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