“Economic activity has been sustained in the short term. This is positive because it allows more time to prepare for the challenges that the world economy now faces, while the upcoming period of rising unemployment may also be shorter. But it is hard to foresee any lasting relief, as long as the fundamental problems related to inflation, energy supply and geopolitical turmoil persist," says SEB’s Chief Economist Jens Magnusson.
A widespread consumption-led downturn after a resilient 2022
We have revised our forecasts for 2022 upward. We expect GDP growth in advanced economies (the 38 OECD countries) to reach 2.7 per cent this year, but we expect 2023 to be characterised by a widespread consumption-led economic downturn. In the United States, GDP will fall in both the first and second quarters of next year. In Western Europe, we expect negative full-year 2023 growth in both the euro area and the United Kingdom. We have lowered our forecasts of GDP growth in the OECD countries for 2023 and 2024 to 0.5 per cent and 1.9 per cent, respectively. In the emerging market (EM) sphere, our forecasts are relatively unchanged. Due to Chinese recovery, overall EM growth will accelerate slightly in 2023. Global GDP growth will reach a low of 2.3 per cent in 2023, slightly above the 2 per cent often used as a benchmark for global recession.
"Historically, recessions have often been triggered by imbalances in the corporate sector, for example via investment excesses or large inventory fluctuations, and in recent decades also via financial imbalances, which have led to major changes in access to credit. Today companies are more resilient, and parts of the manufacturing sector will benefit from increased rearmament and underlying investment needs related to the climate transition. Instead, because of inflation and interest rate shocks, households are the most severely affected,” says Håkan Frisén, SEB’s Head of Economic Forecasting.
Rising unemployment and, to varying degrees, falling home prices will probably also contribute to ever-stronger headwinds facing households. The risks to our GDP forecast are on the downside. A complete shutdown of Russian gas supplies this winter cannot be ruled out. Aggressive key rate hikes raise the question of whether the US Federal Reserve and other central banks are underestimating the interest rate sensitivity of their economies and the risks of financial stress symptoms.
Inflation and key interest rates are close to peaking
Inflation signals have become more mixed, and the differences between the US and Western Europe are more evident, especially in the energy field. We expect euro area inflation to peak towards the end of 2022, six months after the US. This coming spring, inflation will fall noticeably. Yet we expect inflation to stay relatively high during 2023 and to remain above the 2 per cent central bank target for quite some time. Cost increases are so large that many actors − both businesses and households − will seek compensation for them. Their dispersion in the economy will be more prolonged. Central banks will continue to raise their key rates a bit more, but the end of the hiking cycle is approaching. We expect the US key interest rate to peak at 4.75 per cent (upper end of range) and the ECB deposit rate to peak at 2.75 per cent in early 2023. After that, long-term government bond yields may begin to fall. The US dollar will maintain its grip for some time to come. The dollar’s tailwind from Fed rate hikes will fade next year. But high energy prices, which are putting pressure on euro area economies and weakening their current account balances, are delaying the euro’s low point.