Most economic growth forecasts have been upgraded since the start of the year on the back of modest pick-up after weakness in the latter months of 2022. The current outlook suggests that the global economy may have started a modest recovery. Growth is projected to remain at below-trend rates in 2023 and 2024, according to the OECD’s latest outlook report.
The ongoing war of aggression against Ukraine, trade tensions, rising costs of living, and more recent concerns around the vulnerabilities of financial institutions, continue to represent significant downside risks creating uncertainty.
Declining energy prices have contributed to a modest improvement in the global outlook, together with some easing of headline inflation, although core inflation is proving sticky with strong price increases in the services sector. Elevated inflation coupled with tight labour markets is likely to see many central banks maintaining high policy rates into 2024.
EuroZone – fragile recovery continues
Despite a solid year-end growth and a good start to the year the outlook for 2023 is one of stagnation, with a risk of a mild recession. ECB baseline forecast is for 1.0% GDP growth this year, more bullish than the OECD’s projected 0.82%.
Headline inflation appears to have peaked, with the annual rate down to 6.9% in March, from a peak of 10.6% in October, largely driven by a fall in energy prices. Tighter monetary policy is expected to further dampen domestic demand into 2024. The European Central Bank could decide to halt further interest rates rises this summer.
The German economy, Europe’s largest, is expected to avoid recession, and expand by 0.3% this year, thanks to a drop in energy prices among other factors. Inflation is expected to see a marginal drop from 6.9% in 2022 to 6% this year. Positive indicators include successive monthly increases in factory orders and rising exports, with business confidence rising in March for the fifth success month to its highest since February 2022, the month Russia invaded Ukraine, although still below pre-pandemic averages. German consumer confidence is expected to improve in April as energy prices drop, according to the latest report from GfK. However, persistent inflation is likely to continue to stall a sustained recovery in domestic demand.
United States – possibility of recession in mid-year despite strong Q1
The outlook for real GDP growth improved over the past three months on some stronger than expected data. Inflation moderated notably in March, as consumer prices rose 5% from a year earlier, continuing the slowdown from the peak at 8.9% in June 2022. The Federal Reserve raised its benchmark interest rate to a range of 4.75% to 5.0% in March, the highest rate since 2007.Demand for labour remains strong, with unemployment rate falling in March to 3.5%. The moderate pace of hiring in recent months shows that the Fed’s inflation fighting strategy is gradually delivering.
Consumer confidence unexpectedly increased slightly in March, based on a more positive outlook about expectation of what’s ahead, despite the recent financial market turmoil as two regional banks collapsed. However, the confidence index remains below the average in 2022. Americans expect inflation to remain elevated over the next year. Though the correlation between confidence and consumer spending has been weak, survey results suggest that consumption could continue to grow at a moderate clip and keep the overall economy afloat. Consumers report their intention to cut back spending on highly discretionary services, but to spend more on less discretionary services, including hotel expenditure on personal travel. (The Conference Board, Consumer Confidence Index March 2023)
The US dollar remains relatively strong, trading at €0.91 in March, stronger than the trend line over the past five years, having traded at close to parity from July to November 2022.
UK economy expected to shrink this year
The UK is on track to be the worst performing G7 economy this year, according to the latest IMF report. This despite the fact that the near term economic downturn is set to be shorter and shallower, with the medium term output higher, than previous forecasts.
While consumer confidence improved marginally in March, the highest reading in a year amid better economic forecasts, the metric remains well below long term average.
Concerns over personal finances continue to weigh heavily, as wages are not keeping pace with cost of living increases, despite significant pressure from strikes and a tight labour market. (GfK Consumer Confidence Indicator, March 2023).
Inflation unexpectedly jumped in February to 10.4%, after three months of decline, placing further pressure on households. Food and energy bills, as well as higher interest rates currently at 4.25%, with the expectation that it will increase further in May, are squeezing household budgets. The UK consumer is increasing focused on value. Inflation is likely to fall in 2023 but there is a strong possibility that it could prove more difficult to unwind.
The pound sterling was trading at 1.13 euro in March, with exchange rate volatility evident over the past 5 years.
Ireland – economic growth forecast upgraded
The Irish domestic economy is forecast to grow by 3.8% in 2023 and by 3.9% in 2024, according to the ESRI latest quarterly economic report. Inflation is expected to moderate due to falling energy prices, falling to 4.5% this year. Prices are forecast to remain high, leading to interest rates remaining high for longer – putting pressure on many household budgets.
The job market is expected to remain tight, with unemployment near historical low of 4.3% in February.
Consumer confidence declined to a three month low in March, well below the February 2022 mark. The latest monthly marginal decline in sentiment highlights the pressures on household finances rather than a dramatic change in mood, according to the KBC Bank survey.
Just under half of Irish people (49%) expect the economic situation to deteriorate over the next year, with 56% reporting that they are worse off than a year ago, according to latest research from Permanent TSB.