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Global economic output exceeded expectations in early 2023. Led by post-pandemic surges in mainland China and India, global real GDP grew at an annual rate of 3.2% qoq in the first quarter of 2023, twice the previous rate the previous quarter. This increase was achieved despite stagnation in Western Europe and weak growth of 1.3% in the United States. The May S&P Global Purchasing Managers’ Index™ (PMI) surveys highlight a dichotomy between resilient services and ailing manufacturing sectors, reflected in output, new business and prices.
Due to tightening financial conditions, global growth is likely to have slowed in the second quarter and remain below potential into mid-2024. Rising interest rates and reduced access to credit will limit growth in business investment and discretionary consumer spending. Meanwhile, post-pandemic surge in service activity will slow. After rising 3.1% in 2022, the S&P Global Market Intelligence The forecast assumes global real GDP of 2.4% in 2023, 2.5% in 2024 and 2.8% in 2025.
Policy rates are nearing their peaks, but the fight against inflation is not over yet.
With core inflation at unacceptably high levels, the US Federal Reserve and European Central Bank are expected to hike interest rates by 25 basis points in July, and the Bank of England will follow suit in August. Meanwhile, tightening bank lending standards will also lead to tighter funding conditions in the coming months. For countries with high debt burdens, the rise in interest rates will lead to budgetary strains. In most regions of the world, monetary easing will begin in 2024 after more tangible progress is made in reducing inflation.
Price inflation is easing but wage pressures remain.
Global consumer price inflation has slowed from a peak of 8.3% yoy in September 2022 to 5.3% in May 2023. Industrial material prices have fallen in response to improved supply and logistics conditions, high interest rates and weak demand for goods. As crop production increases, the increase in food prices gradually decreases. However, service price increases have been more persistent due to labor shortages, pent-up demand and capacity reductions during the pandemic. Therefore, further progress in reducing inflation will depend in part on a rise in unemployment (mainly in North America and western Europe) in the coming year. As wage pressures ease, global consumer price inflation is expected to slow from 7.6% in 2022 to 5.6% this year and 3.6% in 2024.
The US economy will embark on a slow growth path and avoid a recession.
Earlier in June, President Biden signed legislation suspending the federal debt ceiling until 2024 and limiting government spending until 2025. With a debt crisis averted, real GDP growth forecast this month is revised down by 0.3 percentage point to 1.5% in the month 2023 and raised by 0.4 percent point to 1.3% in 2024. Recent data on consumer spending and construction showed stronger momentum in the second quarter than previously expected. A rebound in housing construction in May suggests property markets are stabilizing after more than a year of sharp declines. A cautionary tale is the renewed fall in real domestic income in the first quarter, pointing to a weaker US economy than spending data suggests. A key risk is a sharp deterioration in the quality of commercial real estate credit, leading to further tightening of credit and reduced investment in non-residential buildings.
High inflation and a more restrictive monetary policy are dampening growth in the euro zone.
Euro-zone real GDP decreased by 0.1% quarter on quarter in both the fourth quarter of 2022 and the first quarter of 2023 (0.4% on an annualized basis). Germany’s economy slipped into recession while Italy, Spain and France saw moderate growth. Declines in euro-zone consumption and inventory investment in the first quarter were partially offset by gains in net exports and fixed investment, which benefited from new projects funded by the EU Recovery and Resilience Facility. As economic growth picks up again in the second quarter, tighter credit conditions will slow consumer and corporate spending. Eurozone real GDP growth is expected to slow to 0.7% in 2023, from 3.5% in 2022. As inflation and interest rates fall, growth will slowly improve to 1.0% in 2024 and 1.6% in 2025.
After an initial recovery from the COVID-19 crisis, growth in mainland China is slowing.
Industrial production rose just 3.5% yoy in May – a reflection of weak domestic and external demand. Sentiment among households and businesses is poor, leading to cautious spending. As in other regions, growth will be driven by service consumption. While fixed investment by state-owned enterprises rose 8.4% year-on-year from January to May, investment by private enterprises stagnated. The recovery in housing markets has been uneven: Despite a pick-up in sales, housing starts fell by 22.7% year-on-year in the first five months of 2023. Real GDP growth in mainland China is expected to slow to 5.0% in 2023, from 5.5% in 2023, and to 4.8% in 2025. That forecast will increase by 0.3 percentage points in 2024 and revised downwards by 0.2 percentage points in 2025.
bottom line
Global economic expansion will proceed at a moderate pace. Economic performance will vary by sector and region, with Europe and the Americas seeing sluggish growth and parts of Asia Pacific and Africa showing healthy growth. With commodity prices well below their peaks and supply conditions improving, inflation will fall, allowing for monetary easing in 2024-2025.
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Editor’s note: The summary bullet points for this article were selected by Seeking Alpha editors.
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