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Stalling or crawling?

Global Economics Quarterly

Global growth was more resilient than many feared through the third quarter of 2022. Inflation may have peaked, the pace of central bank rate rises is finally slowing, and financial markets mainly rallied in the final months of the year.

But high frequency indicators, particularly survey data, are sending a very clear message that global growth could stall in early 2023. The slowdown in global goods demand and high inventory levels mean that industrial production and world trade growth look set to head lower. Housing markets globally are already reeling from the impact of higher mortgage rates. We expect this to lead to weaker consumer spending, too.

What happens next in mainland China could be key. Recent announcements of a relaxation of pandemic-related restrictions and a package of measures to stabilise the property market have the potential to support a rebound in growth. However, it’s likely to be a bumpy path, particularly in early 2023, when – based on experience elsewhere – China could see a jump in COVID-19 cases, resulting in a setback in mobility before a more sustained rebound in in-person activities in the course of the year.

If China does grow more strongly than expected, the flip side is that this could throw another curveball at central bankers looking to tame inflation: China’s relative weakness in 2022 was reflected in both lower oil demand and trading partners’ import prices.

In fact, we do expect inflation in many places to slow from very high levels in the coming months. It could even continue to surprise markets on the downside in the US in the near term, helped by the fall in oil prices and heavy discounting in goods prices.

But over the medium and long term, we expect inflation to take longer to return sustainably to a 2% target than implied in central bank forecasts, with structural factors keeping it persistently higher than desired. Wage growth typically lags inflation, especially when labour markets are tight. The behaviour of wage-setters – companies and employees – will be under close scrutiny from policymakers in the coming months.

The behaviour of wage-setters – companies and employees – will be under close scrutiny from policymakers.

Against this backdrop, we think major central banks are likely to continue to tighten policy in the early months of 2023. We expect a further raise from the US Federal Reserve and – unlike some in the financial markets – we do not expect the Fed to cut rates in 2023. And in Europe, we see the European Central Bank continuing to raise rates through most of the recession before an extended pause.

Where does all of this leave our forecasts? Our global GDP forecast for 2023 of 1.8% are broadly unchanged from three months ago, thanks to more resilient demand in the US and eurozone in the second half of 2022, and despite downward revisions to China and India. We think growth will improve but remain lacklustre in 2024 with an average rate of 2.4%. The outlook for developed economies is particularly muted: we see them growing at an average of 0.5% in 2023, then crawling back to just under 1% in 2024.

Our global inflation forecasts, meanwhile, have barely changed. We forecast global inflation of above 6% in 2023 and above 4% in 2024.

Overall, the growth-inflation trade-off we see is worse than pre-pandemic and that seemingly priced in by financial markets – or, indeed, reflected in most central bank published forecasts.

First published 4th January 2023.

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Note: this page was updated on 10 January 2023 to reflect changes to forecasts, including the 2023 global GDP growth forecast of 1.8% (previously 1.9%).

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