- United States: The US economy has been showing signs of deceleration, as the fiscal and monetary policy drag weigh on activity, although at different intensity. Although some upside surprise may come from a stronger-than-expected Q4, we keep seeing significant growth deceleration unfolding, driven by weakening domestic demand and global growth. Growth will remain significantly below potential on average in 2023-24, with particular weakness in H2 2023, implying heightened recession risks. Inflation seems to have peaked and have moved to a lower monthly regime, yet we expect stickiness in underlying inflation, with the core index declining more slowly than the headline one.
- Eurozone: We upgraded our Eurozone growth outlook. While we still expect weakness and activity contraction over winter, we expect it to be less profound than previously feared. Notwithstanding the modest upward revision, headwinds for the Eurozone economy remain significant. Over the spring-summer period we expect some growth recovery, even if modest at this stage, helped by decelerating inflation and improved sentiment. Tighter monetary policy will represent a clear headwind, keeping growth below potential in 2023-24. Risks related to the energy crisis seem to have receded, but remain prominent for both the inflation and growth outlook.
- United Kingdom: With persistent inflation projections -- seen above target for several quarters -- we foresee a cost-of-living-induced recession playing out in the United Kingdom during early 2023, extending for a few quarters. Fiscal and monetary policy will weigh on growth too. Although we improved slightly our outlook, we see all headwinds as still present for the UK economy. With some modest recovery to follow, we see the economy running below potential also in 2024. As for the Eurozone, energy crisis risks remain prominent for both the inflation and growth outlook.
- Japan: The first signals for 2023 growth performance are mixed and for now we keep our below-consensus growth forecast of 0.5% for 2023, with an uneven recovery taking shape. The strong external-oriented manufacturing sector will be, on one side, hit strongly by weakening global demand, as shown by business surveys. On the other side, China’s reopening has been favouring Japan as one of the most important targets of Chinese travelling abroad. In the meantime, December national CPI data confirmed the gloomy picture painted by Tokyo CPI (4.0% YoY, strongest growth in around 40 years), making though the BoJ job tougher.

- Fed: Inflation has been declining over the past several months against a backdrop of moderate growth, but with inflation still high and indications of continued supply-demand imbalances, monetary policy still has work to do to bring inflation back to 2%. We expect the Fed to raise the Fed Funds rate to 5.25% in March before pausing for a few months. Fed officials have emphasised that the focus should shift from ‘how fast’ towards ‘how far’ rates need to rise and how long those levels need to be maintained. Our scenario now includes a contraction in economic activity in Q3 and a rapid decline in inflation. Now, we anticipate the first rate cut in December, while previously we were expecting it in January.
- ECB: At its February meeting, the ECB hiked rates by 50bp and pointed out their intention to deliver another 50bp raise in March. Both the statement and the press conference were hawkish, despite the ECB no longer sees upside risks in its inflation forecasts. Our baseline expectation is for the ECB to hike by 50bp at its March meeting and follow up with 25bp hikes in May and June. This means a terminal rate of 3.50% before summer, above market expectations, currently at 3.25%. The persistence of core inflation will pressure the ECB, with core CPI close to 4.5% in the third quarter according to our scenario.
- BoJ: After the surprise move in December, the BoJ held its policy unchanged at the January meeting. Expecting tepid recovery in 2023 and frontloaded inflation pressures in H1, we believe the goal of policy normalisation is to exit Negative Interest Rate Policy (NIRP) without additional rate hikes. We expect the BoJ to terminate YCC in March and NIRP in June. Risks to our forecasts are skewed towards a delayed ending of NIRP.
- BoE: The BoE delivered a 50bp hike at its February meeting, with the Bank Rate now at 4.0%. The split vote over the decision was expected, as seven out of nine policymakers backed the 50bp move, while two members preferred no rate hike. On rates guidance, the MPC signalled a likely reduction of the hiking pace to 25bp at the upcoming meeting. When referring to future moves, the minutes dropped the reference to “forcefully” (understood as meaning 50bp rate hike increments). We confirm our expectation for the terminal rate of this hiking cycle, which is likely to slow to 25bp moves from March, with a peak still at 4.5% in our baseline scenario.