Executive Summary
Forecast Changes
The outlook for the global economy has deteriorated slightly over the past month, with restrictive monetary policy weighing on growth prospects next year. We forecast global GDP growth of 2.8% in 2023, unchanged from a month ago, while our forecast for global GDP growth in 2024 has been revised down slightly to 2.3%. Downward revisions to our economic outlook for the euro area and the United Kingdom are the main contributors to our downgrade of global growth this month.
We now see a recession in the euro area in the second half of 2023 as more likely than not. Consumer spending is likely to remain sluggish, although it may not weaken much further. However, a deteriorating corporate earnings environment and declining capacity utilization should lead to a decline in investment spending (and overall GDP) in the second half of this year. We also expect only a gradual recovery next year and have lowered our GDP growth forecast for the euro area to just 0.5% in 2024.
We have become less constructive on the outlook for the US dollar, as progress in reducing US inflation suggests that the risks are tilted towards earlier rather than later Fed easing. Despite the resilience of the US economy, this should limit the dollar’s near-term gains. A more pronounced depreciation of the US dollar is also possible next year, either in the context of a mild US recession or a soft landing and lower US yields, with some loss of safe-haven support for the US dollar.
Key themes
The trend of underwhelming economic news is becoming broader and more widespread, reinforcing our view that the global economy will experience slower growth in 2024. Tight monetary policy is likely to continue to weigh on economic activity, while weak sentiment surveys remain consistent with slower growth ahead. In addition to a broad-based growth slowdown, the eurozone, the United Kingdom and the United States are among the economies that we expect to fall into recession.
Inflation trends have started to slow more markedly in the major developed economies, although the overall pace of price increases remains too high for the G10 central banks to consider lowering interest rates for the time being. However, if the positive inflation news continues over the next few months, rate cuts could come more clearly into view by early next year.
We see the potential for a pronounced depreciation of the US dollar over the course of 2024 under a wide range of economic scenarios. The risks appear tilted towards earlier Fed rate cuts, which should weigh on the US dollar over time. Our base case of a U.S. recession would reinforce the outlook for a dollar decline. Even a U.S. soft landing, to the extent that it supports broader financial market sentiment, could reduce safe-haven support for the greenback and thus also weigh on the U.S. dollar.
