Our global macro outlook for 2023

A mild recession in Europe and the US and a sluggish decline in inflation will keep central banks on alert. We expect Chinese growth and oil prices to pick up.

We forecast a mild recession in the US and the euro area in 2023, with real GDP contracting by 0.2% in both places. Significant tightening of financial conditions along with the largest inflation shock to real incomes in decades will continue to take their toll on economic activity. On a more positive note, the relatively strong balance sheets of households and corporates should help cushion the recession’s impact.

In the US, we expect household consumption to bend (but not break) as unemployment rises gradually in the second half of next year. In the euro area, the labour market looks resilient and fiscal policy should remain broadly supportive, but the energy shock is too large to offset completely.
China is facing the short-term risk of a chaotic post-covid reopening, but also structural obstacles to growth due to housing deleveraging and government regulations. We forecast Chinese real GDP to grow by 4.5% in 2023.

The oil market looks set to be remain broadly balanced in the short term, but rising demand post China’s reopening combined with low supply elasticity may boost prices in H2 2023. Our central scenario is for Brent prices to reach USD115 per barrel at end-2023.

On the heels of the US, we believe that inflation has also peaked in the euro area. We continue to forecast global disinflation in core goods as supply constraints ease and demand slows. However, price pressures in labour-intensive service sectors will likely persist into next year. We forecast headline and core inflation to decline to around 3% by the end of 2023, both in the US and in the euro area.

Central banks will ‘keep at it’ until there is convincing evidence that core inflation is easing. We see a terminal rate of 5.25% for the Fed fund rate, and 2.50% for the ECB’s deposit rate, with upside risks. Even as central banks prepare to slow the pace of tightening, their communication is likely to remain hawkish with a view to keeping inflation expectations anchored. Over the longer run, however, central banks could be tempted to allow inflation to run above their 2% target (to, say, 3%) as the least-worst solution.

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