GROWTH: The global economy is doing better than expected. The IMF is the latest to raise its GDP growth outlook for this year, at the same time as cutting inflation forecasts. This less-bad combination has underpinned the stock market rally, as stagflation fears were proved wrong. And as central banks now prepare to stop interest rate hikes with inflation fallen sharply. Yet the world economy is ‘On track, but not yet out of the woods’. Risks remain uncomfortably high and regional differences big. Asia is counter-cyclical and expanding with inflation low. Whilst Europe leads the cyclical downturn, but is also forecast to be first to recover (see chart). This macro combo keeps us positive markets, but focused on ‘defensive growth’, and cautious on cyclicals.
OUTLOOK: The IMF raised its global GDP growth outlook for this year by 0.2% to 3.0%. This was led by increasing US forecasts, which offset the outlook for a small German recession, and a stable but still-concerning China outlook. The inflation outlook was cut by 0.2% to a still high, but less-bad, 6.8%. These better averages mask a big gap between the advanced economy slowdown and more resilient emerging markets. Overall, global growth is still losing momentum as interest rate hikes bite, and the disinflation pace is slowing down as labour markets stay firm.
RISKS: The IMF warns that risks remain high and tilted to the downside. GDP growth is slower than last year’s 3.5% and under the long-term average, whilst credit conditions are tight. This is clear in the latest flash PMI’s and European bank lending survey. PMIs show the current global manufacturing recession, and now easing services strength. Whilst Euro area lending standards are tight and loan demand falling, with the region the ‘canary’ of the global slowdown. The sticky underlying inflation trends also risk a higher-for-longer US Fed and a BoJ tightening ‘surprise’.
All data, figures & charts are valid as of 26/07/2023.