We’ve updated our forecasts given the many moving parts in the macro environment. The outlook for the global economy remains weak, but divergence is a key theme. We still think the US is heading for recession, but the global risk distribution is improving. 

Market pricing of a US soft landing has risen, but we retain our recession baseline. The data deterioration is broadening as we expected. But we have revised up GDP a little, and think the probability of a soft landing is slightly higher. We expect just two more 25bp hikes in this cycle. 

We now think the Eurozone can come through its winter challenges stagnating rather than contracting. But persistently strong core inflation means we are revising higher the ECB path. Alongside spillovers from the US, this will lead to a recession later in 2023. 

The rapid spread of Covid through the Chinese population means the shift to endemic living can occur earlier. Our activity index is already improving, and our new forecasts envisage China as the fastest growing major economy in 2023. But Chinese re-opening won’t be a tide that lifts all boats globally. 

Divergence remains the central theme within broader EMs. China re-opening “winners” include tourist destinations like Thailand and Malaysia. “Credible pivoters” where inflation has peaked – the likes of Brazil and Chile in LatAm, or Korea and Taiwan in Asia – will see rate cutting cycles get underway. But Emerging Europe is still dealing with exceptionally elevated inflation. And many frontier markets face significant macro imbalances. 

In Japan, despite the overshoot of inflation, underlying price pressures are weaker than elsewhere. Our baseline is still that the BoJ will fight a rearguard action to maintain YCC. But market pressure, partly of the BoJ’s own making, means a high risk of letting the policy go.