Global economy continues to cool

In this article, the IPC’s chief economist, Shawn DuBravac, presents readers with a plethora of market information including company and consumer sentiment

Per IPC’s May 2023 Economic Outlook report, the global economy continues to cool, but not quite as severely as expected at the start of the year. Stronger-than-expected growth in 2023 will come at the cost of weaker growth in 2024.

The IPC’s chief economist, Shawn DuBravac, said: “Consumer confidence fell sharply in the last month, erasing half of the gains since the all-time low levels of June 2022. Business confidence has also been weak. Manufacturers report a subdued outlook in both the US and Europe. Leading economic indicators continue to suggest a high risk of recession this year, even if the timing continues to push later into the year.”

Labor markets remain extremely strong, despite the widely held view that recession is imminent. Both the US and Europe are enjoying record low levels of unemployment. Employment remains strong even in markets where growth has turned negative. Germany for example just expected a second quarter of negative GDP growth in Q1. The country is likely in recession. But Germany also has one of the lowest unemployment rates in Europe at just 2.8 per cent. Job openings remain strong as well. Job openings in the US rose 358,000 in April to 10.1 million while layoffs eased during the month.

Strong labor markets and solid wage growth are likely to keep inflationary pressures stubbornly high. In the US, the personal consumption expenditures price (PCE) index, the Fed’s preferred gauge of price increases, remains high. PCE excluding food and energy costs, rose 0.4 per cent in April. Prices are up 4.7 per cent over the last year, where they have hovered since December 2022. The euro area annual inflation rate was seven per cent in April, up from 6.9 per cent in the prior month. This is down from 7.4 per cent the previous year but still well above the ECB’s target of two per cent.

Last month DuBravac wrote: “Right now, the futures market suggests little chance of a rate increase at any of the five remaining meetings in 2023. In fact, the financial markets suggest a 99 per cent chance of a rate cut by the end of the year, with the highest probability being a cumulative 75 basis point cut, starting in the third quarter and the end of the year. I am less sanguine than others. I believe there should be some expectation of at least one additional rate hike in 2023 and a lower probability of rate cuts later in the year.”

In the last month the markets have caught up with my perspective. Today the futures markets are suggesting better than 50 per cent probability of a rate hike in the June meeting. Higher rates will undoubtedly slow the economy further and likely push against further employment gains. Recent work by former Fed chair Ben Bernanke and former IMF chief economist Olivier Blanchard suggests unemployment might need to rise to 4.3 per cent in order to cool inflation.

Confidence weakened over the last month. Consumer confidence fell sharply in the last month, erasing half of the gains since the all-time low levels of June 2022. Some of the weakness was likely the result of the uncertainty surrounding debt ceiling discussions. Business confidence has also been weak. Manufacturers report a subdued outlook in both the US and Europe.

Behind the headline numbers, data provides a more subtle picture of confidence. For example, the share of consumers planning to buy vehicles over the next six months rose compared to last month. The share planning to buy major appliances including refrigerators, washing machines and televisions rose to a seven-month high in the last month. Household finances remain intact and declining price pressure is likely making a better time to make major purchases when compared with last year. Consumer spending rose in April after a few flat months. Business investment in the US was solid in the last quarter and orders for durable goods rose sharply in April.

The monthly IPC sentiment reports point to a slowing environment, but still a growing environment. The number of firms reporting that orders are expanding is declining, but the majority of firms continue to report that orders are rising and they expect that to continue in the months ahead. At the same time, cost pressures continue to decline which is helping companies to satisfy those orders.