Mark Berrisford-Smith
HSBCs Head Economist gives his latest update on the global and notional financial picture.
Key points
The outlook for the global economy has improved during the past few months, as the world learns to live with the war in Ukraine, and as commodity prices continue to ease. All major economies are now expected to avoid recessions, though growth rates will still be sluggish by historical standards. The recovery also remains skewed towards services, as spending patterns continue to normalise after the Covid lockdowns.
Faced with growing evidence of the stickiness of ‘core’ inflation, central banks have continued to raise interest rates, notwithstanding the recent episodes of bank failures. The tightening cycle is nearly at an end, with the last moves from the Federal Reserve and the Bank of England expected in June. But it will be well into next year before interest rates are cut in any of the world’s major economies.
This period of sustained higher interest rates will pose challenges for some business models, both in the world of commerce and in finance. Further rescues of ailing banks cannot be ruled out, with smaller institutions in the USA being an ongoing source of concern. Financial markets could also become a little wobbly in coming weeks if the latest stand-off over the US debt ceiling remains unresolved.
In the UK, business activity and sentiment have likewise improved, especially in services and in the construction sector. GDP is now expected to expand by 0.4% during 2023, as opposed to the decline of 0.6% expected in our previous Update report. The recovery is also being assisted by the modest fiscal stimulus delivered in March’s Budget, especially the “full expensing” of capital spending by businesses for the next three years. With the annual rate of inflation set to ease more quickly, as last year’s steep increases in energy prices drop out of the calculation, and with earnings growth still resilient, the “cost of living crisis” should come to an end during the summer.
Conditions in the UK labour market remain tight. The level of vacancies is falling, but only very slowly. Recent government initiatives on childcare and migration will help, but at this rate it could be another two years until the market returns to its pre-Covid state. This implies continued upward pressure on wages, which in turn means that bringing down ‘core’ inflation, especially in prices for services, will be a long battle.
Higher-than-expected inflation readings for February and March have led to a change of view on the outlook for interest rates, so that we now expect UK Bank Rate to top out at 4.75% in June. We don’t expect any rate cuts until beyond the end of 2024, on account of the expectation that the annual rate of consumer price inflation will not return close to the 2% target until sometime in 2025.
To read the full report, click here.