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Macro Monthly: A challenging journey

14 Jul 2023

Key takeaways

  • Central banks hope they are near the end of their interest rate hiking cycles...

  • ...but an array of upside and downside global risks could derail the best-laid plans

  • Monetary policymaking could also be complicated by fiscal actions both in the short and medium term

An end to the most aggressive central bank rate hiking cycle in decades is gradually drawing closer – but we are certainly not there yet.

Demand has been resilient and headline inflation falling

Are we nearly there?

At the global level, some of the economic data have not looked too bad in recent months. Despite a global industrial recession, the services sector has kept the global composite PMI, a key measure of economic activity, on an upward trend (Chart 1).

Global inflation peaked last September, and has continued to edge lower, while some emerging market central banks, which were among the first to respond to rising inflation back in 2021, are now confident their work is done (Chart 2).

Source: Refinitiv Datastream
Source: Refinitiv Datastream, HSBC

But G10 central banks are still hawkish

However, it’s a different picture in the advanced economies. Every G10 central bank,except Japan’s, has surprised in a hawkish direction, either in action or communication. And the outlook is precarious.

Tighter financial conditions are causing strain

The regional banking sector crisis of early March sparked fears that deeper financial sector turmoil could follow. While this has not, as yet, materialised, financial conditions are tightening and there are more signs that delinquencies are rising. China’s reopening boom also appears to have stalled and the eurozone did not manage to avoid a recession after all.

Central banks are determined to bring inflation to target

Most importantly, with core inflation way too high and labour markets still tight, the major central banks are seemingly determined to finish the business of fighting inflation back to target. This is still a world where any country or sector reliant on leverage will continue to feel the strain.

We see global GDP growth slowing to 2.3% in 2023

Our forecasts

Against this backdrop, our global forecasts are virtually unchanged from three months ago. We see global GDP slowing from 3.1% in 2022 to 2.3% in 2023, and 2.2% in 2024. On inflation, we still expect some stickiness to persist; our global forecast is 6.3% for 2023, and 4.8% for 2024.

This is still a highly uncertain world, however, in which factors, including the long-term implications of the pandemic and the ongoing war in Ukraine, still have the potential to surprise.There are risks to our forecasts both to the upside and to the downside.

Note: *India data is calendar year forecast here for comparability. Previous forecasts are shown in parenthesis, and are from the Macro Monthly dated 12 April 2023. Green indicates an upward revision, red indicates a downward revision. Source: Bloomberg, HSBC Economics

Reduced trade tensions could be an upside risk…

The upside risks…

What could drive average global growth higher? A reduction in trade frictions and geopolitical tensions would have the potential to do so. European consumers could lower their savings rates. Or growth in places, such as India or Japan, could prove surprisingly strong.

…while the impact of higher rates has yet to be fully seen

…and the downside risks

On the downside, the clearest risks relate to high inflation and monetary tightening. Even if there were to be no further rate hikes from here, households, companies and sovereigns will continue to feel the impact of the monetary tightening delivered so far. Commercial real estate remains a key area of concern.

A further challenge for central banks is that even as they try to slow demand to tame inflation, governments are effectively adding to demand, through policies, such as US tax incentives to encourage reshoring and European energy subsidies.

Governments, too, are facing their own difficult choices. How can they meet growing spending demands with higher interest rates making it more expensive to service their sharply higher debts? A challenging journey lies ahead.

Source: Bloomberg, HSBC ⬆Positive surprise – actual is higher than consensus, ⬇ Negative surprise – actual is lower than consensus, ➡ Actual is in line with consensus
Source: Refinitiv Eikon, HSBC

Related Insights

Most central banks hope they can finally take a breather…[11 Oct]

Global demand is slowing as tighter policy takes effect…[15 Sep]

European inflation remains too high for central banks…[14 Jun]

Slowing exports and wobbly demand in China are curtailing growth across Asia...[7 Jul]

Disclosure appendix

Additional disclosures

1. This report is dated as at  14 July 2023.

2. All market data included in this report are dated as at close 13 July 2023, unless a different date and/or a specific time of day is indicated in the report.

3. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking, Principal Trading, and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.

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