International economic outlook

Summary

Forecast changes

• We have revised our global GDP forecast marginally higher as good news in terms of activity continues to flow in; however, our global growth forecast is likely close to plateauing. Our forecast for 2023 global GDP growth of 2.5% is up only modestly from our forecast of 2.4% from a month ago. Upward growth revisions to the United States, United Kingdom and Mexico are the key drivers of our upward revision.

• Given resilient activity and only a gradual slowing of inflation, we now forecast select central banks will maintain restrictive monetary policy for longer. We now forecast the Bank of England will raise its policy rate to a peak of 5.00% and will not begin lowering interest rates until Q2 of next year. We also anticipate that rate cuts from the Federal Reserve, Bank of Canada and Bank of Mexico will begin in Q1-2024, compared to our previous forecast for rate cuts to start in Q4-2023.

• Given our expectation for a more resilient U.S. economy in early 2023 and later Fed tightening, we forecast a slower pace of U.S. dollar depreciation than previously. We expect U.S. dollar depreciation to be modest during Q4-2023 as market attention turns toward Fed rate cuts, but anticipate dollar weakness will pick up pace during 2024. We forecast the trade-weighted U.S. dollar will decline 0.75% over the rest of 2023 and fall a further 5.5% through 2024.

Key themes

• The global economy continues to display resilience and modest improvement. An improving trend for confidence surveys, especially for the service sector, continues to suggest more encouraging prospects for 2023. That said, improving news on economic activity might be nearing an end, and global GDP growth prospects still remain subdued, as we forecast 2.5% growth for both 2023 and 2024.

• Global inflation pressures remain persistent, a trend which is likely to see key central banks maintain relatively restrictive monetary policy for some time. Headline inflation has receded, although core inflation is slowing more gradually, while wage growth also remains elevated. These dynamics will likely encourage central banks to keep policy interest rates higher for longer. For the G10 central banks, we do not see rate cuts beginning until 2024, while institutions in the emerging markets are likely to ease first but more gradually than markets are priced for.

• Given U.S. economic resilience in early 2023 and our forecast for later Fed easing, we expect the U.S. dollar to experience a slower pace of depreciation over the medium term. We believe the greenback will be broadly stable through 2023 before declining as U.S. growth and monetary policy trends weigh on the currency. We expect the yen to be a key beneficiary from U.S. dollar weakness and expect moderate gains in the euro, while among the emerging markets, we continue to forecast long-term strength for most currencies. We have, however, turned less constructive on the South African rand as the economy is likely to come under more severe pressure and as policymakers express concern for the currency going forward.

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