The global outlook continues to be characterized by uncertainty and significant downside risks. Recent data is challenging the once perceived strength of China’s post-pandemic recovery. Better-than-anticipated Q1 results lift the growth outlook for several advanced economies. Services are up, manufacturing not so much. Oil slows as demand weakens with inflation easing as energy prices deflate. Central banks not ready to pause, or are they?
HolonIQ's June 2023 Global Economic Outlook outlines our latest expectations for the global economy and more specifically the G20, for our customers at the world's largest and leading governments, institutions, firms and investors. This month we reflect on the first five months of data for 2023 shaping expectations and look over the horizon at the mega trends shaping the bookends of our short term and long term outlook. Request a Demo for more information on how HolonIQ can help power decisions that matter at your organization.
China's uneven economic recovery leaves many questions unanswered. With almost half of the year behind us, lingering questions about the strength of China’s post-pandemic recovery are beginning to worry markets. Weakening factory activity in China is causing worry, which is particularly troubling for economies that heavily rely on Chinese export demand, as domestic demand falters. Regional economies including South Korea and Singapore, where first quarter growth results disappointed, stand to gain the most from a strong rebound in the Chinese economy. China’s retail sales growth also missed expectations in April pointing towards weakness in the domestic economy.However, it would require several additional months of data to determine the trajectory of the Chinese manufacturing sector and the resultant impact on global economies.
Better-than-anticipated first quarter results lifts growth outlooks for several economies. Most of the advanced economies now have released data to allow an evaluation of the global economy's first-quarter performance. Notably, several countries in Latin America and European economies including France and Italy posted stronger than expected results in 1Q 2023. However, Germany, the largest economy in Europe, entered a technical recession in the first quarter of the year and is projected to record the slowest full-year growth among the G20 nations, barring Argentina and Russia. As a result of the stronger-than-anticipated data coming in, we have raised the GDP growth forecast for several countries including the UK, Mexico and Italy. The UK saw the most significant revision (from a contraction of 0.5% previously expected to an expansion of 0.2% in 2023) as incoming economic data pointed towards a much more resilient economy than projected at the start of the year. Nevertheless, the overall global economic outlook remains pessimistic with most economies expected to experience subdued domestic demand conditions for the remainder of the year. The US and the UK could also experience mild recessions during the year though significant shocks to the economy are likely to be avoided. This sluggish performance in Western economies poses challenges for the overall global economic outlook and will likely impact trade and investment flows to emerging markets as well.
The services sector continues to expand while manufacturing activity subsides. Full transmission of increased rates will expose vulnerabilities in the global economy. The services sector has outperformed the manufacturing sector thus far this year.The divergence between the services and manufacturing sectors highlights the evolving consumption patterns influenced by shifting borrowing costs and changing consumer preferences. Higher borrowing costs have squeezed company bottom lines which, combined with lackluster demand conditions, have led to contractions in the manufacturing sector. The post-Covid recovery in tourism is likely to be a driver of the expansion of the services sector going forward, which however also implies that costs of the services sector are likely to exert upward pressure on inflation. As the effects of successive interest rate hikes over the past few months fully permeate the economy, vulnerabilities in sectors with high levels of debt are expected to become more apparent as we progress into 2023. In the United States, smaller regional banks that have exposure to the real estate sector may face strain, leading to further consolidation within the sector.
Inflation easing faster as energy prices deflate, though core inflation remains above the comfortable levels. Inflation was seen to be receding faster than expected in some countries in April and Mayas energy prices fell and the pass-through effects of the decline in energy prices are finally being reflected in other categories including food and transport. The effect of the base effects of high inflation in the previous year is also likely to be more evident in the second half of the year, further driving down inflationary pressures. However, core inflation remains stubbornly high in some countries, particularly in the European region, with the ECB having signaled further rate hikes in coming months.
Weakening demand is likely to cap oil price increase. The energy market continues to be a significant driver of economic dynamics in2023. OPEC+ decisions and fluctuations in global demand have played a crucial role in shaping oil prices. While OPEC+ could be considering further production cuts to stabilize prices, changes in demand are likely to be the more dominant factor, capping oil price gains in coming months. The ongoing transition to renewable energy sources and efforts to reduce carbon emissions is also likely to have longer term implications for energy markets, alongside potential implications for inflation, trade balances, and overall economic performance.
