The European Central Bank is expected to continue aggressively raising interest rates in the short term as the Eurozone economy proves to be more resilient than expected.
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After reopening China and an avalanche of positive data surprises in recent weeks, economists are upgrading their previously bleak forecasts for the global economy.
Data released last week showed signs of slowing inflation and a less sharp slowdown in activity, prompting Barclays On Friday, it will raise its forecast for global growth to 2.2% in 2023, up 0.5 percentage point from its last estimate in mid-November.
“This is largely driven by a 1.0pp increase in our forecast for growth in China to 4.8% from last week, but also reflects a 0.7pp increase in the Eurozone (to -0.1%, largely on Germany’s much better forecast), and,” Christian Keller said. To a lesser extent, upgrades of 0.2ppi in the US (to 0.6%), Japan (to 1.0%) and the UK (-0.7%).
“The US will still be in recession, as we expect slightly negative growth in three quarters (Q2-Q4 2023), but it will be very shallow, as 2023 annualized GDP growth will now remain positive.”
US Consumer Price Index for December fell 0.1% m/m to record 6.5% yoy, in line with expectations mostly driven by lower energy prices and slowing increases in food prices.
However, Keller suggested a more important measure of how the US economy is doing, and how the Fed’s monetary policy tightening might unfold, was the Atlanta Fed’s wages tracker in December.
Last week’s average hourly earnings (AHE) data signaled a sharp slowdown in wage pressures, supporting estimates last week, falling by a full percentage point to 5.5% year-on-year.
Philadelphia Fed President Patrick Harker, a new voting member of the Federal Open Market Committee, said last week that a 25 basis point rate hike would be appropriate going forward. A similar tone was struck by the President of the Federal Reserve Bank of Boston, Susan Collins, and the President of the Federal Reserve Bank of San Francisco, Mary Daley.
The central bank has been aggressively raising interest rates to rein in inflation while hoping to engineer a soft landing for the US economy. In line with market pricing, Barclays believes the balance in the FOMC has now shifted about 25 basis points from the February meeting onwards.
Where the Bank of England differs from market rates is its final rate forecast. Barclays expects the Federal Open Market Committee to raise the federal funds rate to 5.25% at its May meeting before ending the hike cycle, beating current market rates to a peak of just under 5%, as policymakers wait to see more evidence of slowing demand for oil. Employment and wage pressures.
Barclays suggested that viscous core inflation in the Eurozone would keep the ECB on track to deliver its sticky 50bp hikes in February and March before ending the tightening cycle at the 3% deposit rate, while continuing to tighten its balance. binding.
Inflation has proven more steady in the UK, where the labor market also remains tight, energy bills are set to rise in April and widespread manufacturing activity is exerting upward pressure on wage growth, prompting economists to warn of possible inflationary effects in the round. the second.
Barclays updated forecasts for another 25 basis point increase from the Bank of England in May after 50 basis points in February and 25 in March, which raised the final interest rate to 4.5%.
Shallow recessions in Europe and the United Kingdom
Surprisingly strong activity data in the Eurozone and the UK last week may provide more scope for central banks to raise interest rates and bring inflation back to the ground.
“This week’s better-than-expected GDP data for Germany and the UK – epicenters of growth pessimism – add further evidence that the economic fallout has been less severe than the more uncertain energy situation that was suggested a few months ago,” Keller said.
“Although it varied by country, generally large fiscal support packages in Europe and the UK to deal with higher energy prices must have also contributed, healthy labor market conditions and, on average, strong household savings. “
Berenberg also raised its outlook for the Eurozone in light of the recent influx of news, particularly lower gas prices, a rebound in consumer confidence and a modest improvement in the business outlook.
Germany’s Federal Statistics Office showed on Friday that Europe’s largest economy stagnated in the fourth quarter of 2022 rather than contracting, and Berenberg Holger Schmieding’s chief economist said its apparent resilience had two major implications for the outlook across the 20-country joint currency bloc.
“Because Germany is more exposed to gas risks than the eurozone as a whole, that would suggest that the eurozone probably wasn’t any worse than Germany late last year and thus may have avoided a significant contraction in fourth-quarter GDP.” He said.
“Given the continued recovery in business and consumer confidence, it seems unlikely that the first quarter of 2023 will be significantly worse than the fourth quarter of 2022.”
Instead of a cumulative decline in real GDP of 0.9% in the fourth quarter of 2022 and the first quarter of 2023, Berenberg now expects a decline of just 0.3% over the period.
With less ground loss to offset, the pace of recovery in the second half of 2023 and early 2024 after potentially stabilizing in the second quarter of 2023 will also be less steep (0.3% qoq in 4q 2023, 0.4% qoq in the first quarter and 0.5% qoq in the second quarter 2024 instead of 0.4%, 0.5% and 0.6% qoq, respectively,” Schmieding added.
So Berenberg has raised its calls for the average annual change to real GDP in 2023 from a contraction of 0.2% to growth of 0.3%.
The German investment bank also raised its forecast for 2023 in the UK from a 1% contraction for the year to a contraction of 0.8%, citing Brexit, the legacy of former Prime Minister Liz Truss’s disastrous economic policy and tighter fiscal policy for the UK’s continued underperformance against the eurozone.
Positive economic surprises — notably a 1% monthly increase in eurozone industrial production in November — coupled with unseasonably mild temperatures, which dampened energy demand, and a rapid reopening in China also led TS Lombard on Friday to raise its growth forecasts. Eurozone from -0.6% to -0.1% for 2023.
While the consensus forecast is heading towards outright positive growth as worst-case scenarios for the eurozone are priced in, TS Lombard chief economist Davide Oneglia said an “L-shaped recovery” remains the most likely scenario for 2023, rather than a full recovery. .
“This is the result of three main factors: 1) the cumulative tightening of the European Central Bank (and spillovers from global monetary tightening) will begin to show its full impact on the real economy in the coming quarters; 2) the US economy is about to lose ground on top of that; and 3) China is reopening to a weak economy, where mostly pro-growth drivers will end up reviving domestic consumer services with limited benefits to EA capital goods exports,” Oneglia said.