Inflation continues to moderate in multiple regions and countries but remains high, and central banks look set to maintain a path of interest rate interventions. However, interest rates and sentiment are weighing on growth projections and the picture is somewhat patchy, with growth in some emerging economies such as China and India outpacing developed economies. In developed economies, the United States saw the Federal Reserve revise down its latest economic growth projections for 2023 and 2024 to 0.4% and 1.2%, respectively. In Europe, the International Monetary Fund has reconfirmed previous projections for 2022’s growth rate at 3.5% but revised up its 2023 outlook by 0.1 percentage point, a less optimistic view (at 0.2 percentage points lower) than the European Central Bank’s March figures (Exhibits 1 and 2).
Interest rate rises have also resulted in volatility in the banking sector. Rising rates have seen existing holdings of government bonds fall in value, leaving smaller banks especially vulnerable as the value of their assets drops, potentially generating losses when they have to sell these securities. In March, swift action by banking authorities and the wider banking sector prevented potential contagion across the global banking system following the collapse of Silicon Valley Bank (SVB) and Signature Bank in the United States, and the distressed sale of Credit Suisse in Europe.
However, ratings agencies also downgraded the credit rating of a third medium-size bank, San Francisco-based First Republic, citing a surfeit of uninsured deposits. In April, fears of a resurgence in banking turmoil were reignited as shares in the bank, known for catering to high-net-worth individuals, lost more than half their value on news that customers had pulled more than $100 billion in deposits. Customers with large balances were concerned their funds would not be covered in full by the Federal Deposit Insurance Corporation. First Republic was taken over by JPMorgan Chase on May 1 and banking sector shares remain volatile.
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This volatility in the banking sector is likely one of the factors to have affected wider economic sentiment. McKinsey’s latest snapshot of global economic conditions surveyed executives twice in March: immediately before the upheavals in the banking sector, starting with the closure of SVB, and then again three weeks later. In early March, respondents were more positive than they had been in several quarters: 40% said that global economic conditions had improved in the previous six months, the first time in a year that respondents were more likely to report improvements than declines. And 45% said that they expected global conditions to improve in the months ahead, while only 28% predicted that conditions would worsen. However, by the end of the month, that optimism had fallen away. Respondents were much less positive than they were in early March about current global conditions and the global economy’s prospects—though they were still more upbeat than they had been in the previous quarter (Exhibit 3).
In advanced economies, US inflation edged down, in part due to energy prices. On May 3, as anticipated, the Fed raised rates to a target range of 5.0–5.25%. Eurozone inflation slowed to 6.9% in March (8.5% in February), and the ECB estimates inflation will reach 2.8% by the end of 2023.
United States. Inflation edged down to 5.0%, with energy prices contributing to this decline. The Fed continued with a rate rise in May. At the Federal Open Market Committee meeting held March 21–22, 2023, participants’ median projections for GDP growth were 0.4% and 1.2% for 2023 and 2024, respectively—down from December’s projection of 0.5% and 1.6%. Members of Congress proposed new legislation—the Limit, Save, Grow Act—that would set discretionary spending levels for the coming year at fiscal year 2022 levels and limit spending growth to no more than 1% per year.
Eurozone. The latest IMF projections are less optimistic than the ECB’s. Inflation slows where energy prices declined, although food prices remain high; the eurozone reports a trade surplus. The figures mask the usual eurozone heterogeneity: while Spain saw its 2023 growth rate improving from 1.1% to 1.5%, Germany entered negative territory, with an expected decline of 0.1%. France and Italy kept their rates of 0.7% and 0.6%, respectively.
United Kingdom. Inflation decreased by less than expected in March, to 10.1%. The labor market remains tight but shows signs of easing. Spring forecasts estimated a mild recession in 2023, followed by a moderate rebound in 2024. The United Kingdom is only one of two G7 countries predicted by the IMF to contract in 2023. However, at its May 11 policy meeting, the Bank of England upgraded its growth estimate, saying it no longer expects the United Kingdom to enter into recession in 2023. Meanwhile, on May 12, the Office for National Statistics said the UK economy grew by 0.1% in the first quarter of 2023.
In emerging economies, China’s growth has accelerated since the economy fully opened from its “zero-COVID-19” policies, while India is predicted to be the fastest-growing major economy in the world in 2023; inflation in emerging markets eased, especially in Brazil (exhibit).
China. China’s economy had a strong start in Q1 2023. GDP growth accelerated to 4.5%, above market estimates; fixed-asset investment, housing sales, and new social financing expanded faster, compared with Q4 2022; however, trade remained weak in Q1 2023. In the first quarter of 2023, China’s GDP reported a stronger-than-expected growth rate of 4.5% year over year (2.9% in Q4 2022), with 67% of growth driven by consumption. GDP growth in the services sector accelerated to 5.4% year over year (2.3% in Q4 2022), while GDP growth in the agriculture and industry sectors stabilized at 3.7% and 3.3% year over year (4.0% and 3.4% in Q4 2022), respectively.
India. Despite earlier real GDP forecasts being downgraded, India is set to be among the fastest-growing major economies in the world, contributing some 15% of global growth. Demand conditions in India remain sanguine, with urban consumption rising and rural demand indicators improving. The Reserve Bank of India revised its real GDP projections for 2022–23 to 6.5%, well above the IMF’s updated projection of 5.9%.
Brazil. Inflation continues its downward trajectory; Lula da Silva completes his first 100 days as president but faces important challenges ahead. Consumer sentiment in relation to both the current and future economic situation improved, with consumer confidence increasing to 87 in March (up from 84.5 in February). However, the index remains below the 100-point threshold, indicating that Brazilian consumers are still pessimistic.
Russia. Russia’s 2022 GDP slump has been driven by domestic consumption and net trade, with late 2022 and early 2023 marked by stagnation. The 2023 outlook depends on government support and trade, as domestic demand remains weak; inflation fell sharply below 4% on an annual basis. Detailed 2022 GDP data confirm that Russian GDP declined by 2.1%, with household consumption and net trade weighing on growth. However, fixed investments and government spending helped avoid a deeper slump.
McKinsey’s Global Economics Intelligence (GEI) provides macroeconomic data and analysis of the world economy. Each monthly release includes an executive summary on global critical trends and risks, as well as focused insights on the latest national and regional developments. View the full report for April 2023 here. Detailed visualized data for the global economy, with focused reports on selected individual economies, are also provided as PDF downloads on McKinsey.com. The report is available free to email subscribers and through the McKinsey Insights App. To add a name to our subscriber list, click here. GEI is a joint project of McKinsey’s Strategy and Corporate Finance Practice and the McKinsey Global Institute.
