“Strong performance in the real economy has helped to keep inflation high but has also made it easier for central banks to hike their key interest rates quickly without worrying about rising unemployment and rapidly declining growth. But now the signs of a deceleration are becoming clearer, while inflation is finally starting to slow down. This will change the playing field,” says SEB’s Chief Economist Jens Magnusson.
The economic downturn will be mild
The United States and the euro area will enter a mild recession this year, followed by only a moderate recovery in 2024. GDP growth in the OECD countries will be 0.9 per cent in 2023 and 1.4 per cent next year, respectively, which is below trend for both years. We have revised our 2023 forecast upward by a couple of tenths compared to Nordic Outlook in January, after continued resilience around the turn of the year. Looking ahead, squeezed real incomes due to high inflation, rising interest rates and falling home prices will take their toll on households. Lower demand will push up unemployment this coming autumn, and businesses will face both high interest rates and tighter credit conditions. However, the reopening of the Chinese economy will provide long-awaited growth acceleration and strengthen global demand, which is otherwise weak. We expect global GDP to grow by 2.5 per cent in 2023 and 2.9 per cent in 2024.
Inflation will fall in 2023, but with only a sluggish decline in core inflation
In recent years, inflation has been driven higher by an almost perfect price storm: supply constraints and a boom in demand during the COVID-19 pandemic, followed by an increasingly tight energy situation. This put businesses in a situation where almost all their input costs rose and where, unlike before, it was also possible to pass on rising costs to the final consumer. Commodity, energy and freight prices have now fallen, and the upturns in producer prices are decelerating. This increases the likelihood that consumer goods prices will also decline, although this will be some way off because of long lead times. Total inflation will fall in 2023, but as rents and wages accelerate, core inflation will not reach the central banks’ 2 per cent target until well into 2024.
“Because of uncertainty about the extent of remaining price increases in the system, inflation risks will be on the upside until this summer, while long-term risks will instead be on the downside," says Daniel Bergvall, Head of Economic Forecasting at SEB.
Key rates soon peaking – Fed will begin cuts this autumn
Key interest rates are now close to their peak, but several central banks have one or more steps to go. The Fed will be first to make rate cuts, starting in November. The European Central Bank (ECB) will follow suit in 2024. Yet monetary policies will remain contractionary, with above-equilibrium interest rates. Banking sector turbulence in the US and Europe have demonstrated new dangers to financial stability. However, we believe that rapid intervention by regulatory authorities is enough to avoid a financial crisis.
“But these developments remind us of the risks associated with dramatic changes like those we have seen in monetary policy over the past year. Monetary policy also has its impact after a time lag. There is a risk that central banks may have gone a little too far and too fast in their rate hiking cycles. The Fed and the ECB are continuing to hike their key rates, even though their internal forecasts have pointed to weak growth or even recession. This shows their strong, clear focus on bringing down inflation,” says Daniel Bergvall.