This week, we published our latest global economic forecasts for 2023 and 2024 in The Big Picture – Recession with different undercurrents, 28 November. We expect the western economies to fall into a recession next year, but the drivers and length of the weakness vary between different areas. The euro area is on the brink of a recession already now, as the high inflation from energy supply shortages weighs on real incomes. Furthermore, we expect a ‘double-dip’ recession also on the H2 of 2023, as the impact from tighter financial conditions and the slowdown in the US weigh on growth. Colder weather has once again lifted natural gas and electricity prices from mid-November, highlighting how the energy supply situation still remains tight. While we forecast a modest recovery in 2024, limited energy supply will remain a structural hurdle constraining growth for years to come.
The near-term outlook for US remains somewhat more upbeat although some of the leading indicators, including Chicago PMIs released this week, have already fallen to recessionary levels as well. We expect US economy the fall into a recession starting from Q2 next year, but compared to the euro area, the US recession will be more traditional policy-driven slowdown. After aggregate demand has cooled down into equilibrium with supply, the economy can start to recover towards its potential growth pace by H2 2024.
We expect both ECB and Fed to maintain financial conditions restrictive well into 2023. In contrast however, Fed’s chair Powell appeared more confident in Fed’s ability to eventually cool down inflation back to target in his speech this week. Powell highlighted not just inflation risks, but also that Fed wants to avoid overtightening the economy into a recession, sparking a rally in the risk markets. As FOMC’s December meeting is less than two weeks away and the blackout period begins on Saturday, consensus and markets seem well aligned for a 50bp hike. That said, we discuss some of the reasons and data releases which could still tilt the balance towards a larger hike in Research US – 50 or 75bp? Fed’s December Checklist, 30 November.
The ECB also received some preliminary positive news this week, as euro area flash HICP eased from the October peak to 10.0%. That said, past rises in especially energy prices are still feeding into consumer prices. We also expect core inflation to only return to ECB’s target by H2 2024 (see details from Euro inflation notes – A ‘sticky’ problem, 30 November). The expectation of persistent inflation and further tightening in financial conditions is also reflected in our FX Top Trades 2023 – Our guide on how to position for the year ahead, 2 December, where we expect the broad USD strength to continue.
Next week will be quiet in terms of key data releases as markets await the final ECB and Fed meetings of the year 14th and 15th of December. In euro area, October Retail Sales will be released on Monday, but focus will mostly remain on final ECB comments ahead of blackout starting on Thursday. In the US, ISM services index will be key to gauging if private consumption has truly cracked in November after PMIs signalled clearly weakening growth earlier. In China, Caixin Services PMI will be released on Monday, but focus remains on any new signals around the Covid and economic policies. The Reserve Bank of Australia will have a monetary policy meeting, we expect a 25bp hike.
