April 7, 2023
Global Economic Resilience, For Now
The much-anticipated first-quarter recession failed to arrive. While the global banking sector has experienced some turbulence related to rising interest rates, the economic impact has been limited thus far. This unexpected resilience of the global economy may be good news with an expiration date, however. Economists continue to warn of downside risks related to persistent inflation, rising rates, lower spending and lower lending. Macroeconomic indicators continue to flash red, but a potential recession is taking its time to arrive.
Paul Gruenwald, global chief economist at S&P Global Ratings, suggests in his latest outlook that the strong policy response to finance sector turbulence in the U.S. and Europe seems to have calmed the markets. But inflation continues to bedevil the U.S., European and U.K. economies, and central banks have not backed away from their inflation targets. While we can anticipate that the major central banks will move cautiously in the hope of a soft landing, the downside risks remain significant, with tepid growth projected for the year.
“While our baseline forecast has not changed much since our previous round, the risks around the baseline have shifted materially to the downside,” Gruenwald wrote. “This shift reflects the emergence of financial fragility over the past few weeks and its potential impact on our baseline.”
The U.S. economic outlook continues to be caught between overheated labor markets and a Federal Reserve committed to bringing inflation back toward a 2.0% target, according to S&P Global Ratings. Despite slightly softer job numbers in recent weeks, February wage gains stood at 4.6% year over year — an indication that job seekers remain very much in demand. The upheaval in the banking sector increases the likelihood of a hard landing, with a mild recession projected for this year.
Still, resilience in the U.S. economy persists alongside its less-desirable twin, inflation. S&P Global Market Intelligence shows U.S. output returning to growth in March. Producers have worked to reduce their backlogs, and supply chain improvements are driving down the inflation that was hitting raw materials. The service sector remains overheated, with wage growth a strong driver of inflation. But the resilience of the economy will encourage an aggressive monetary policy from the Federal Reserve.
In Europe, economic resilience has surprised as well. Positive data on real GDP and survey data in the eurozone and EU indicate unexpected strength in the economy. However, S&P Global Ratings revised down projected eurozone GDP growth for 2024 to 1.0% from 1.4% in their previous outlook.
China, as in previous outlooks, appears to be on track for its relatively modest GDP growth target of about 5%. Strength in China will have some positive impacts on Asia-Pacific economies, while other emerging markets will suffer from slower growth this year due to conditions in the U.S. and eurozone.
Overall, unexpected resilience is the order of the day for the global economy. When, and if, recession finally hits, it will be arriving much later than expected.
Source: S&P – Daily Update – by Nathan Hunt
Legal Notice: The information in this article is intended for information purposes only. It is not intended for professional information purposes specific to a person or an institution. Every institution has different requirements because of its own circumstances even though they bear a resemblance to each other. Consequently, it is your interest to consult on an expert before taking a decision based on information stated in this article and putting into practice. Neither Karen Audit nor related person or institutions are not responsible for any damages or losses that might occur in consequence of the use of the information in this article by private or formal, real or legal person and institutions.
