International Economic Outlook: January 2023

Summary

Forecast Changes

• We believe the outlook for global growth has improved, and we now forecast the global economy to grow 1.9% this year. While we are still forecasting a global recession in 2023, we now believe recessions in the Eurozone and U.K. will be milder than initially expected. China reopening from Zero-COVID policies also improves the global economic outlook as well as China's own growth prospects—we now believe the Chinese economy can grow 5.2% this year. The inflation outlook has also improved as supply chain disruptions smooth and commodity prices moderate. We now forecast global CPI of 4.8% this year, down from a prior forecast of over 5%.

• Improving growth prospects and softer inflation are working against each other; however, we continue to believe G10 central bank tightening cycles will end in H1-2023. We made nuanced changes to our Federal Reserve forecast and now see the U.S. central bank raising interest rates in 25 bps clips until a terminal fed funds rate of 5.00%-5.25% is reached. ECB policymakers are now some of the most hawkish in the world, and we now believe the ECB will raise rates another 125 bps in the first half of this year.

• With the Fed no longer leading the charge on interest rate hikes and U.S. economic trends set to worsen, we now believe the U.S. dollar has entered a period of cyclical depreciation against most foreign currencies. We believe the euro and Japanese yen can perform well, while the best opportunities for currency appreciation can be found in the emerging markets, specifically in countries where local politics are stable and underlying economic trends are relatively sound.

Key Themes

• Evidence is building that global economic conditions are improving and global growth may be slightly more robust than we initially expected. Lower commodity prices and improving supply chain dynamics should see global inflation fall quickly, while slower inflation should enhance consumer purchasing power. Against this backdrop, we forecast firmer global GDP growth for 2023, including a more resilient outlook for the Eurozone and U.K. economies. In addition, China lifting Zero-COVID policies and allowing for unrestricted mobility should improve China's growth prospects and, in turn, the global growth outlook.

• Our outlook for monetary policy has not changed materially. The prospect of slower inflation, but more resilient activity offset each other, and we still expect G10 central banks to complete their policy rate hike cycles during the first half of 2023. Still, there have been some notable changes for individual central banks. The Fed is transitioning to a less hawkish approach, shifting to smaller rate hikes. In contrast, the European Central Bank has turned more hawkish, while the Bank of Japan has effectively joined the global tightening cycle by allowing government bond yields to move higher.

• We believe the U.S. dollar has embarked upon a prolonged period of depreciation, as relative growth and monetary policy fundamentals become less supportive of the greenback. In the short term, we expect U.S. dollar depreciation to be gradual as the U.S. economy falls into recession, while the Fed hesitates to lower interest rates prematurely. We expect the U.S. dollar's depreciation to gather pace in the second half of 2023 and into 2024 as we believe the Fed will start cutting interest rates quicker than foreign central banks.

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