Mark Berrisford-Smith, Head of Economics, Commercial Banking, HSBC UK brings us his regular Economic Update.
Key points
The war in Ukraine continues to weigh on the prospects for the global economy, especially in Europe. Gas prices have fallen sharply from the extraordinary peaks reached in late August, and food prices have also come off their spring highs. But many households in gas-importing countries will still face very high utility bills, and so will inevitably cut back spending on other areas. Residential property markets are also coming under pressure as borrowing costs rise.
Our short-term growth projections have again been slashed, with the US economy expected to expand by a mere 0.4% next year and the Euro Area expected to contract by 0.2%. Even with China set for a revival (assuming that it will eventually be able to relax its Covid restrictions) and India continuing to expand at a brisk pace, global GDP is still forecast to expand by only 1.8% in 2023.
Inflation rates should top out in the next few months in most countries, although they are set to take longer to fall back than was envisaged in our previous Update. The past few months have seen considerable volatility in financial markets as they come to terms with aggressive hikes in interest rates by central banks.
The biggest increases are now behind us, with monetary tightening expected to have run its course in most advanced economies early next year. But only a few countries are likely to see any rate cuts during 2023.
The UK economy entered recession in the third quarter, with matters not being helped by the political and financial turmoil that accompanied the short-lived premiership of Liz Truss. GDP is expected to contract by around 1% over three quarters, with a sluggish revival getting under way from the middle of next year.
In common with other gas-importing countries, much will depend on what happens to wholesale gas prices and on what measures the government can take to weaken the link between gas and electricity prices.
The annual rate of inflation came in at 11.1% in October which, it is hoped, will be the peak. But price pressures will abate only gradually, with the headline rate sustained by the ending of universal support for energy bills in April. The annual CPI rate is still expected to be at over 5% at the end of 2023, which means that the squeeze on household incomes will persist for at least another year.
With calm having been restored to financial markets after September’s ill-judged “mini Budget”, and with the government now set on a course of fiscal consolidation, we now expect the Bank of England to raise Bank Rate by only another 75 basis points. But, when the peak of 3.75% is reached, likely in early February, that’s where it will remain for some time. Indeed, if inflation doesn’t abate as expected, further increases could become necessary towards the end of 2023.
To read the full update, click here.