Back to school: what macro environment to expect in the upcoming months?

Interest rates are rising at a rapid pace, as central banks admit that inflation is no longer just a series of transient shocks, but there is a risk that it becomes more ingrained. For many, this feels like a new regime in monetary policy and financial markets.

The US federal funds rate has risen again and is currently five times higher than three months ago. Meanwhile, the European Central Bank (ECB) has just raised its rates for the first time in 11 years and ended eight years of negative interest rates. Even the Bank of England (BoE) stepped up its pace of hikes at its last meeting.

Yet, markets appear to have bought into the idea that the Fed is close to a ‘pivot’, after recent guidance from chair Powell. However, our analysis on how far the economy has slowed during past cycles to lower inflation suggests that the US economy must enter a recession in order to defeat inflation pressures.

With monetary policy actively working to lower demand, fiscal policy is likely to be more active to support households. We discuss recent measures announced, but ultimately, the global fiscal impulse has turned negative – a further headwind for global growth.

We now expect global growth of 2.6% for this year, slowing to just 1.5% growth for 2023. Apart from the covid-19 pandemic, this will be the weakest year for global growth since 2009. Heavy downgrades have been applied to the US, eurozone and UK forecasts.

Global inflation is forecast to rise from 3.4% in 2021 to 7.2% this year, before moderating to 4.3% in 2023. This is helped by a fall in year-on-year energy inflation, but also higher interest rates which work to lower domestic pressures.

China is likely to continue its recovery from the impact of covid-related lockdowns, aided by policy support which is just starting to have an impact. But the rebound is likely to be short-lived as problems in the housing market appear to be worsening, while the external outlook is set to deteriorate. The People’s Bank has already cut two of its key policy rates, meaning there is a chance that rates could fall further.