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Macro monthly: Soft landing looking possible

15 Sep 2023

Key takeaways

  • Global demand is slowing as tighter policy takes effect…

  • …with mixed inflation results across the world…

  • …as central banks mull over their next moves

Divergence is still the key theme in the global economic data – with services faring much better than manufacturing (although services may be starting to cool,too). In a similar vein, inflationary pressures are hanging around in Europe, but we have seen some much more encouraging data in the US, in Latin America and across Asia as central bankers in those regions mull over whether to stop tightening or (in some cases) have already started easing policy.

Growth in the US is expected to be strong in Q3

The much-anticipated US recession hasn’t come, at least yet, with the economy looking like it may have even accelerated in Q3 on the back of early data (Chart 1),following on from broadly decent readings through the second quarter. Recessions continue to be avoided in Europe, too, although the recent survey data there have taken a turn for the worse and the manufacturing side of the economy remains weak (Chart 2).

Source: Macrobond, Atlanta Fed
Source: S&P Global, Macrobond. Note: Aug 2023 services data is flash.

Consumer spending has been a bright spot in China

Keeping with the theme of softer data, the recovery in mainland China has slowed further (Chart 3), led by weakness in the property sector and the manufacturing and trade data. Consumer spending on services continues to recover quickly (Chart 4), but the weakness in the labour market may hold back any subsequent momentum. The broader weakness in global trade will be playing a role here, but there are some tentative signs of a turn in some leading indicators in this space.

Source: Macrobond
Source: Macrobond

Robust wage growth is stoking services inflation in Europe…

So much will come down to developments in the labour market, which in the rest of the world is holding up. Unemployment rates are yet to pick up meaningfully and jobs remain plentiful. Wage growth remains high in Europe, notably the UK, which may be contributing to some of the stickiness in services inflation.

…while US readings are heading towards target

In the US, nominal wage growth has settled just above 4%, but with dropping inflation, real wages are now rising – giving support to consumer demand. Despite this, recent inflation prints have been more promising, with underlying prices hardly rising and with rental inflation set to slow in the coming months (Chart 5), overall core CPI (Chart 6) and personal consumption expenditure inflation readings should head towards the Federal Reserve’s target.

Source: Macrobond
Source: Macrobond

Central banks still need to balance the inflation risks

But, importantly, not all the way there. Central banks are continuing to balance the risks. On one hand, inflation could become more entrenched, if tightening is stopped or reversed too early. On the other, the risks of overtightening are still there, with much of the global economy yet to show clear signs of higher rates biting.

So, while the data suggest that a soft landing is now looking possible, with inflation coming down and growth cooling, not collapsing, the risks of something harder are still there.

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]

Central banks hope they are near the end of their interest rate hiking cycles...[14 Jul]

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

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

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