- United States: After the contraction in Q1 (resulting from an outsized detraction from net exports and a payback from the surge in inventories in Q4, not from weak demand) we expect sequential growth to pick up from Q2 and stabilise around moderate rates of growth consistent with reaching 1.6% in Q4/Q4 22 and 1.5% in Q4/Q4 23. Domestic demand will significantly slow on tightening financial conditions, bringing growth below potential sooner than expected. Inflationary pressures remain elevated from both headline volatile components (energy and food inflation) and stickier core drivers, remaining above 6% till year end.
- Eurozone: The Eurozone looks set for a year of stagnating growth amid high and persistent inflation. We expect the economy to post very limited sequential gains for much of the year; high inflation and low confidence are dampening consumption while uncertainty weighs on investments; domestic demand is weak, and foreign demand isn’t much better, thus reducing the contribution of exports. Inflation has become progressively more broad-based; looking ahead, we continue to expect inflation to remain significantly above the ECB target, as pressures on the core will remain high.
- United Kingdom: Against a backdrop of high and persistent inflation, we expect the economy to quickly lose steam as higher prices and taxes squeeze households real disposable incomes. A technical recession is a material possibility, although for now we expect the economy to avoid posting two consecutive quarters of negative growth. Sequentially, we see GDP remaining on a tightrope between contraction and mild expansion. Inflation momentum is still high as producer pricing pressures continue to increase and survey data remain consistent with inflationary pressures staying higher for a prolonged time.
- Japan: Unlike its DM peers, Japan’s post-pandemic recovery has remained sluggish. GDP contracted again in Q1, and the overall economic output stayed at a same level as in Q4 2020. Business investments were a particular concern, while the recent slide in sentiment doesn’t bode well for a rebound, considering new supply constraints and the continuous deterioration in terms of trade. Inflation, on the other hand, has become increasingly sticky as expectations hit record high. Core inflation will rise further throughout the year, but stay comfortably below BoJ’s 2% target.
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- Fed: At its latest FOMC meeting, the Fed hiked by 50bp and announced that the balance sheet runoff would start in June at a pace in line with market expectations. The meeting confirmed the Fed’s hawkish stance and focus on inflation, pointing to additional hikes likely to remain in the 50bps area at the next two meetings, followed by a possible slowdown to 25bps hikes in the remaining part of the year. This path remains in line with our baseline scenario on US Fed fund rates, pointing to the 2.5% area by year-end, and to a move close to 3/3.25% in one year.
- ECB: President Lagarde confirmed that QE net purchases are likely to end very early in the third quarter, allowing a rate lift-off in July, in line with forward guidance. She added that “based on the current outlook, we are likely to be in a position to exit negative rates by the end of the third quarter”, meaning that a second hike may come in September. The normalisation path in following quarters look more data-dependent, but we expect a third hike in Q4 and a fourth in Q1-23. ECB is also likely to revise down March projections on growth in June meeting
- BoJ: There are good reasons for BoJ to stay dovish. Japan’s economic recovery has lagged behind, with a deep output gap that is not expected to close before 2024. Consumer inflation, albeit strengthening, has stayed contained. Against this backdrop, BoJ has repeatedly stated that the cost-driven increase in inflation is not sustainable. It has maintained its ultra-loose monetary policy and defended its YCC target range by committing to buy unlimited amount of JGBs. Leaving the JPY mostly to MoF, BoJ will continue to prioritise the domestic economy and stay accommodative.
- BoE: The Bank of England hiked rates by 25bp at its last meeting but failed to introduce an announcement on active QT, postponing it to August. New forecasts show a grim picture for the UK economy, with inflation likely to hit above 10% and GDP to contract in 2023 and expected close to stagnation in 2024. The statement had dovish elements, as well, with two members questioning whether the guidance of further hikes was appropriate. Consistent with this outcome, we still expect the BoE to proceed with a more limited rate hike path than still priced in by the markets
