Thoughts

April 14, 2023 | 14:19

Global Growth: The Fog Hasn’t Lifted Yet

Economist

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

Jennifer Lee

Senior Economist and Managing Director
Economics

(Read more)

When the situation changes, so does the view.

Take the IMF for instance. At this week’s Spring Meetings in Washington D.C., it announced a cut to its 2023 global growth forecast, from the previous call of 2.9% to 2.8%. Financial instability prompted the move, a sign that the “situation remains fragile”, “downside risks dominate” and the “fog around the world economic outlook has thickened”. Indeed, there was fog at the start of the year too. At the World Economic Forum in Davos, Deputy Managing Director Gita Gopinath warned that this would be a “tough year” as the world faced three big challenges: 1) the Russia-Ukraine war; 2) the cost of living crisis; and, 3) interest rates at levels not seen in decades. Those challenges are still with us; but now, there is the addition of the after-effects from a few U.S. bank failures and Credit Suisse.

So the outlook for the global economy is indeed foggy.

Meantime, the fog over the U.K. is a little less thick compared to last summer. This week’s GDP release was, broadly speaking, not bad. The flat February reading was disappointing, but the upward revisions to January made up for it. And the setback was concentrated in areas that saw strike action, such as airline travel, while retail, restaurants, and arts & entertainment (all discretionary spending) were strong.

For all of 2023, the IMF is expecting the U.K. economy to be the weakest in the G7, with real GDP growth falling from 4% in 2022, to -0.3% in 2023. (BMO has a slight positive pencilled in.) But those forecasts are a far cry from what the BoE was calling for last summer, which was for the longest recession ever (six quarters). That would have taken real GDP down 1.5%. Granted, the BoE’s Chief Economist Huw Pill defended those calls back then, as gas prices were surging and the country was in the midst of a leadership change and associated fiscal uncertainty. So, being down 0.3% isn’t bad, in comparison, although it shouldn’t be shouted from the rooftops.

The U.K. also stood out in the latest OECD report on the Labour Market Situation. The release showed that the country had the largest drop in the participation rate among the G7 since the pre-pandemic days. Since 2019Q4, the part rate in 2022Q4 for those aged 15-64 declined 0.9 ppts to 78.6% in Britain, compared to a 0.3 ppts decline to 74.1% in the U.S. but above the G7 average of 75.7%. The others rose. This is problematic for the already-tight job market in Britain, where wages are still rising at a rapid clip (up a smoothed 6.5% y/y). And of course, this is problematic for the BoE as it gears up for its meeting in just under a month. We continue to look for one more rate hike of 25 bps to 4.5%, as stubborn “too high” inflation of 10.4% needs to return to the 2% target.