The European Central Bank is expected to continue to raise interest rates aggressively in the short term as the eurozone economy proves more resilient than expected.
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Afterward China reopens And with loads of surprises about positive data in recent weeks, economists are upgrading their previously dismal outlook for the global economy.
Data released last week showed signs of slowing inflation and a less severe downturn in activity. Barclays on Friday to raise its global growth forecast to 2.2% in 2023, up 0.5 percentage points from the last estimate in mid-November.
This is largely driven by a 1.0 percentage point increase in China’s growth forecast to 4.8% from last week, but also reflects a 0.7 percentage point increase for the region. euro area (to -0.1%, mainly based on much better German forecasts), and, to a lesser extent, a 0.2 percentage point upgrade for the US (to 0.6%) , Japan (up 1.0%) and the UK (-0.7%),” said Barclays Director of Economic Research Christian Keller.
“The US will still experience a recession, as we expect growth to be slightly negative for three quarters (Q2 – Q4 2023), but it will be fairly shallow, as annual GDP growth in 2023 will remain positive. “
December US CPI fell 0.1% month-on-month to 6.5% year-on-year, in line with expectations and mainly due to falling energy prices and slowing food prices.
However, Keller has proposed a more important measure of the economic health of the US economy and how tight monetary policy by the Federal Reserve might play out, which is the track the Atlanta Fed Salary for December.
Last week’s estimates backed up last week’s average hourly earnings (AHE) data, which showed a sharp drop in wage pressures, dropping a whole percentage point to 5.5% year-over-year.
Philadelphia Fed President Patrick Harker, a new voting member of the Federal Open Market Committee, said last week that a 25 basis point increase in interest rates would be appropriate going forward. Boston Fed President Susan Collins and San Francisco Fed President Mary Daly have a similar tone.
The central bank has raised interest rates aggressively to curb inflation while hoping to engineer a soft landing for the US economy. In line with market prices, Barclays believes the balance on the FOMC has now turned to a 25 basis point gain from the February meeting onwards.
Where the Bank of England differs from market valuation is its expectation for the final rate. Barclays predicts the FOMC will raise the Fed funds rate to 5.25% at its May meeting before the end of the spike cycle, exceeding current market valuations with a peak of just under 5%, when the Policymakers await more evidence of slowing labor demand and wage pressures.
Barclays thinks tough core inflation in the euro area will keep the European Central Bank on track to deliver the two foreshadowed 50-basis-point increases in February and March before the end of the cycle. tighten at 3% deposit interest rate, while continuing to tighten balance. paper.
Inflation has proven to be more persistent in the UK, where the labor market remains tight, energy bills are set to rise in April and widespread industrial action is weighing on wage growth, prompting economists to warn of a potential second-round inflationary impact.
Barclays updated its pencil outlook on a 25 basis point increase from the Bank of England in May following 50 basis points in February and 25 in March, bringing the closing rate to 4.5%.
Shallower recessions in Europe and the UK
Surprisingly strong activity data in the euro area and the UK last week could create more room for central banks to raise interest rates and bring inflation back to Earth.
This week’s better-than-expected GDP data for Germany and the UK – the epicenter of growth pessimism – adds to the evidence that the recession is less severe than the energy situation. much more uncertain than suggested a few months ago,” Keller said.
“Although it varies by country, large financial support packages in general in Europe and the UK in response to rising energy prices must also contribute, as should healthy labor market conditions. and strong household savings on average.”
Berenberg also upgraded the eurozone forecast based on recent news streams, in particular lower gasoline prices, recovery in consumer confidence and slightly improved business expectations.
On Friday, Germany’s federal statistics office showed Europe’s largest economy stagnated in the fourth quarter of 2022 rather than in contraction, and Berenberg Chief Economist Holger Schmieding said there was a clear possibility of a rebound in the economy. This economy has two main implications for the prospects of the 20-member common currency bloc.
“Given Germany is more exposed to gas risks than the eurozone as a whole, it suggests that the eurozone may not be (much) worse off than Germany at the end of last year, and that’s not the case,” Schmieding said. Thus, a significant drop in Q4 GDP could be avoided.” speak.
“Based on the ongoing recovery in consumer and business confidence, it doesn’t look like Q1 2023 will be much worse than Q4 2022.”
Instead of a cumulative real GDP decline of 0.9% in Q4 2022 and Q1 2023, Berenberg is now forecasting only a 0.3% decline for the period.
“With less ground to be lost to offset, the recovery rate in the second half of 2023 and early 2024 after potentially stabilizing in the second quarter of 2023 will also be slightly less steep (0.3% qoq). in Q4 2023, 0.4% qoq in Q1 and 0.5% qoq in Q2 2024 instead of 0.4%, 0.5% and 0.6% QoQ respectively), ” added Schmieding.
As a result, Berenberg made a call for the average annual change in real GDP in 2023 from a decline of 0.2% to a growth of 0.3%.
The German investment bank also increased its UK 2023 forecast from a 1% decline on the year to a 0.8% decline, citing Brexit, the legacy of former prime minister Liz Truss’ disastrous economic policy. and tighter fiscal policy for the UK’s underperformance relative to the euro area.
Positive economic surprises — particularly the 1% monthly increase in eurozone industrial production in November — coupled with unseasonably mild temperatures dampened energy demand and China The rapid reopening of the country also prompted TS Lombard on Friday to raise its euro zone growth forecast from -0.6% to -0.1% for 2023.
While consensus projections are pointing towards positive growth purely as worst-case scenarios for the eurozone have been priced in, TS Lombard Senior Economist Davide Oneglia said “the recovery is in shape letter L” remains the most likely scenario for 2023, rather than a full recovery.
“This is the result of three key factors: 1) cumulative ECB tightening (and spillovers from global monetary tightening) will begin to show its full impact on the economy in the coming quarters; 2) the U.S. economy is poised to drop further; and 3) China is reopening in a weak economy, where the main drivers are Pro-growth policies will primarily favor a resurgence of domestic consumer services with limited benefits to EA’s capital goods exports,” said Oneglia.
