- United States: We cut our growth expectations on the back of tight and fast monetary policy action. We call for an extended period of sub-par growth for 2023-24, with increased downside risks from H2 2023. Should monetary policy become even more aggressive than anticipated, a recession may be unavoidable. Inflation: While headline inflation has peaked and should decelerate progressively, core inflation will remain sticky and close to current levels for a few months, before declining slowly, although remaining above target.
- Eurozone: We see a cost-of-living-driven recession during the 2022-23 fall-winter season, followed by a shallow recovery, as price levels remain elevated. We expect the Eurozone economy to contract by -0.5% in 2023 and to recover to 1.3% in 2024 , with downside risks into the 2023-24 winter season. Inflation: We believe inflation has to peak yet, rising into double-digit territory in Q4 2022-Q1 2023 (September 9.9%) and decelerate towards 4.0% by Q4 2023, staying well above target over the forecasting horizon. The outlook remains highly uncertain as highlighted by recent geopolitical events.
- United Kingdom: Growth: We foresee a recession extending for a few quarters, driven by increased cost of living and tight financial conditions. We expect the economy to contract in 2023 and then recover, expanding by 1.3% in 2024. Inflation: We expect inflation to remain elevated and in double-digit territory until Q1 2023 and peak in Q4 2022. Political uncertainty is adding further noise to the economic outlook.
- Japan: As the economy reopened fully in October, it will be boosted by resumed travel and services consumption in Q4. This positive catalyst will postpone Japan’s recession to early 2023. The expected global economy slowdown to 2.2% in 2023 will be the main driver of Japan’s growth. Meanwhile, the increase in underlying inflation is just at its initial stage. We expect core inflation (ex fresh food & energy) to climb above 2.0% in Q4 2022 and Q1 2023. The wage negotiation round due next spring will be a focal point, especially if unions can get wage rises above 3%.
- Fed: We expect the FOMC to deliver a fourth 75bp rate hike at its November meeting. Following the upward revision in inflation forecasts for Q4 2022 and Q1, Q2, and Q3 2023 and according to our expectation for core inflation to surprise on the upside further, we upgraded our Fed terminal rate forecast to 5.25% from 5.00%. This expectation is based on the following assumption: 75bp hike in November, 50bp in December, 50bp in February, and 25bp in March. We see further upward pressure on the terminal rate in the short term. However, the stronger the monetary policy tightening, the higher the risk of having a strong deterioration in economic growth in H2.
- ECB: At its October meeting, the ECB raised its policy rates by 75bp with the deposit rate now at 1.5% and announced changes to the terms of the targeted long-term refinancing operations. By acknowledging the substantial progress made so far in policy normalisation, the ECB sent an important message through a more dovish tone, mainly on the back of deteriorating economic outlook. We expect the ECB to slow the pace of rate hikes in the next meetings. Accordingly, we cut our projection on terminal deposit rate from 2.75% to 2.50%.
- BoJ: As the dollar-yen exchange rate weakened to 150, a 32-year low, MoF intervened on the FX market to slow such depreciation. Meanwhile, the BoJ had to defend its yield-control targets by offering emergency purchases of JGBs. The unprecedented dollar strength and monetary policy gap are exerting upward pressure on JGB yields, as a weaker yen feeds into stronger imported inflation, driving markets to bet that the BoJ will eventually follow up with tightening. However, so far the BoJ has stick to its ultra-loose monetary policy, repeating that wage growth needs to be seen for sustained inflation to emerge.
- BoE: We expect the BoE to deliver a 75bp rate hike at its November meeting, following the two previous hikes of 50bp each. The scaling back of most of the fiscal package previously announced is seen lowering medium-term inflation and gives the BoE a way to less aggressive tightening than the one that would have been induced by the initial package.
At the same time, on the back of high inflationary pressures in the short term, we expect the BoE to keep its current stance, with a terminal rate forecast in the 4.50-4.75% area.
