The European Central Bank is expected to continue raising interest rates aggressively in the short term as the eurozone economy is more resilient than expected.
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After China’s reopening and a flood of positive data in recent weeks, economists are improving their previously gloomy outlook for the global economy.
Data released last week showed signs of slowing inflation and less sharp declines in activity, which suggested Barclays on Friday to raise its forecast for global growth to 2.2 percent in 2023, up 0.5 percentage point from its last estimate in mid-November.
“This is largely due to a 1.0 percent increase in our China growth forecast to 4.8 percent from last week, but also reflects a 0.7 percent rise in the euro zone (to -0.1 percent, largely due to a much better Germany) forecast, and smaller improvements of 0.2 percentage points in the US (up 0.6%), Japan (up 1.0%) and the UK (-0.7%), said Barclays’ head of economic research Christian Keller.
“The US will still be in recession as we forecast slightly negative growth in three quarters (Q2-Q4 2023), but this would be fairly shallow as annual GDP growth in 2023 will now remain positive.”
December US CPI fell 0.1% month-on-month to 6.5% year-on-year, in line with expectations and mainly driven by lower energy prices and a slowdown in food prices.
However, Keller suggested a more important gauge of how the US economy is doing, and how the Federal Reserve’s monetary tightening may evolve, was December’s Atlanta Fed Wage Report.
Last week’s estimate confirmed last week’s average hourly earnings (AHE) data, showing a sharp slowdown in wage pressures, falling a full percentage point to 5.5% year-on-year.
Philadelphia Fed President Patrick Harker, a new member of the Federal Open Market Committee, said in a vote last week that a 25 basis point rate hike would be appropriate going forward. Boston Fed President Susan Collins and San Francisco Fed President Mary Daley echoed similar sentiments.
The central bank has been aggressively raising interest rates to curb the glut, hoping to create a soft landing for the US economy. In line with market pricing, Barclays believes the FOMC balance has now moved to a 25 basis point hike since the February meeting.
Where the UK bank differs from market rates is in terminal rate expectations. Barclays predicts the FOMC will raise the Fed funds rate to 5.25% at its May meeting before ending the hiking cycle, which would push current market prices to just below 5% as policymakers wait are more evidence of slowing labor demand and wage pressures. .
Barclays suggested that sticky core inflation in the euro zone would keep the European Central Bank from carrying out its two telegraph 50 basis point hikes in February and March before ending its tightening cycle with a 3% deposit rate, while continuing to tighten its balance sheet. sheet.
Inflation is steadier in the UK, where the labor market also remains tight, energy bills are due to rise in April and widespread industrial action is putting upward pressure on wage growth, prompting economists to warn of a potential second round of inflationary effects.
Barclays’ renewed forward pegs were raised by the Bank of England by 25 basis points in May, after 50 basis points in February and on March 25, taking the terminal rate to 4.5%.
Shallower declines in Europe and the UK
Surprisingly strong activity data in the euro zone and the UK last week could give central banks more room to raise interest rates and bring inflation back to Earth.
“Better-than-expected GDP data from Germany and the UK, the epicenters of growth pessimism, add further evidence that the economic fallout has been less severe than the much more uncertain energy situation suggested a few months ago,” Keller said.
“Although varying by country, the overall fiscal support packages associated with high energy prices in Europe and the UK should also contribute, as should healthy labor market conditions and, on average, robust household savings.”
Berenberg also upgraded his forecast for the euro zone, given the recent news flow, particularly falling gas prices, recovering consumer confidence and a modest improvement in business expectations.
Germany’s federal statistics office showed on Friday that Europe’s biggest economy stagnated rather than contracted in the fourth quarter of 2022, and Berenberg chief economist Holger Schmieding said its apparent resilience had two main implications for the outlook for the 20-member common currency bloc. for:
“Since Germany is more exposed to gas risks than the euro area as a whole, this suggests that the euro area is likely to be no worse off than Germany was at the end of last year and thus could avoid a significant contraction in fourth-quarter GDP.” – said Schmiding. said:
“Judging by the continued recovery in business and consumer confidence, it seems unlikely that the first quarter of 2023 will be much worse than the fourth quarter of 2022.”
Instead of a 0.9% cumulative decline in real GDP in the fourth quarter of 2022 and the first quarter of 2023, Berenberg now forecasts a decline of just 0.3% over the period.
“With less lost ground made up, recovery rates will also be slightly less steep (Q4 2023 0.4 q/q, 1Q 0 .4 percent and 0.5 percent y/y in the second quarter of 2024, instead of 0.4%, 0.5% and 0.6% y/y, respectively,” Schmiding added.
Consequently, Berenberg raised his calls for the average annual change in real GDP in 2023 from a contraction of 0.2% to growth of 0.3%.
The German investment bank also raised its 2023 UK forecast to 0.8% from a 1% decline, citing Brexit, the legacy of former prime minister Liz Truss’ disastrous economic policies and tighter fiscal policy against the UK’s continued underperformance. the euro zone.
Positive economic surprises, notably a 1% month-on-month rise in euro zone industrial production in November, along with unseasonably mild temperatures that dampened energy demand and a rapid reopening in China also led TS Lombard to withdraw its euro zone growth forecast on Friday. -0.6% to -0.1% in 2023.
While consensus forecasts are moving towards positive absolute growth as worst-case scenarios for the euro zone are discounted, Davide Oneglia, senior economist at TS Lombard, said an “L-shaped recovery” was still the most likely scenario for 2023, rather than full recovery. .
“This is the result of three main factors. 1) The ECB’s accumulated tightening (and the effects of global monetary tightening) will begin to show their full impact on the real economy in the coming quarters; 2) The US economy is poised to lose ground. and 3) China is re-opening to a weak economy where pro-growth policy incentives will mainly support the revival of domestic consumer services, with limited benefits for EA capital goods exports,” Onglia said.