- United States: signs of decelerating growth are increasing as high inflation bites into consumers’ disposable income and companies’ margins. While we do not see activity contracting in Q2, risks to our projections remain on the downside. We do expect the US economy to grow below potential between now and yearend and to remain on a similar sub-par growth trajectory into 2023, as tighter monetary policy impacts the most interest-rate-sensitive sectors of the economy. Inflation should begin moderating by yearend but remain significantly above target as inflationary pressures continue to broaden.
- Eurozone: The upside revision to the Q1 GDP figure (from 0.3% to 0.6%) masks weak domestic demand, especially on the consumption side, and does not bode well for the rest of the year. Higher realised and projected inflation will translate into weaker domestic demand dynamics, making us expect broadly flat growth this year, with contraction risks concentrated in Q2 and Q4. 2023 growth expectations have also been marked down significantly on much weaker momentum entering the new year. Inflation is being revised higher on higher oil price dynamics, unabated pipeline pressures and broadening and accelerating inflationary pressures.
- United Kingdom: High and persistent inflation will translate into a squeeze in households’ real disposable incomes and companies’ margins, making a technical recession a material possibility, in line with recent monthly GDP data. Although for now we expect the economy to avoid posting two consecutive quarters of negative growth, risks remain tilted to the downside as inflationary pressures remain strong and as the hit to consumer and business confidence may not have materialised fully yet. Sequentially, we see GDP remaining on a tightrope between contraction and weak expansion, while inflation momentum remains strong, consistent with inflationary pressures staying higher for a prolonged period of time.
- Japan: Inflation rates have been trending up in the country but remain comfortably low. Optimism on an economic reopening is triumphing over inflation concerns for now, driving the services PMI to multi-year high in May. On the contrary, manufacturing PMI eased for the second consecutive month, reflecting the cooling global expansion and weakening external demand. On net, we expect Japan’s economic recovery to gain momentum from the rebound in private consumption. Its cycle is some distance away from maturing and is still playing a post-pandemic catch-up.
- Fed: The FOMC decided to raise its policy rates by 75 bps – its biggest hike since 1994 – with a target range now at 1.5%-1.75%. We expect the Fed will raise rates by 75bp again in July. Beyond that, we expect a 50bp increase in September and a return to 25bp increases in November before peaking at 3.75% in early 2023. Overall, the FOMC announced a sharper tightening of the policy rate through 2023 and the likely need for policy to be more restrictive next year in order to tackle inflation. With the recent developments on inflation, the FOMC wants to pursue a more aggressive front-loading of rate increases. The path to a soft landing is getting narrower.
- ECB: The ECB remained hawkish at its last regular meeting and will start its rate hikes with a 25bp move in July, followed by a likely 50bp in September, if the inflation picture does not improve. This should be followed by “a gradual but sustained path of further increases”. At the 15th ad hoc meeting following the regular one, the ECB committed to the design of a dedicated anti-fragmentation tool and to the use of flexible PEPP reinvestments: more clarity on the new tool in terms of size and functioning is expected to come by the July meeting.
- BoJ: The BoJ stood firmly as a dovish outlier in June, resisting pressures from bond and FX markets to make a policy change. Governor Kuroda delivered two clear messages that: 1) BoJ will stick to the YCC in order to support the economic recovery, and an expansion of YCC band is equivalent to a tightening; and 2) a sharp yen depreciation will hurt the economy, especially business investments. His statement gained support from PM Kishida, who believes FX is only one of several factors to consider for monetary policy. We expect no change to the YCC during Kuroda’s term.
- BoE: The BoE delivered an expected 25bp hike in June, at the same 6-3 majority of previous meetings and a minority pointing to a 50bp increase. Despite a weaker than expected growth picture, a tight labour market and persistent inflation have opened the door to a more forceful response at future meetings, sending a hawkish message, contrary to the more dovish tone of the May meeting. We expect the last move to be followed by a 25bps hike in August, and by an additional 25bps in Q4, but risks are tilted to a stronger move in August, depending mainly on coming inflation prints.