July’s World Economic Outlook Update from the IMF projects global growth to fall from an estimated 3.5% in 2022 to 3.0% in both 2023 and 2024 (Exhibit 1). The report states, “While the forecast for 2023 is modestly higher than predicted in the April 2023 World Economic Outlook, it remains weak by historical standards.” Meanwhile, the IMF expects global headline inflation to fall from 8.7% in 2022 to 6.8% in 2023 and 5.2% in 2024. It anticipates that underlying (core) inflation will decline more gradually, with forecasts for inflation in 2024 revised upward.
Confidence among consumers has improved, but they remain cautious when considering major purchases (Exhibit 2). Brazil saw consumer confidence increase to 92.3 in June (from 88.2 in May), which is the highest reading since February 2019. However, most countries recorded contraction in consumer spending compared with a year ago, with consumption in China slowing significantly.
Central banks have kept inflation expectations well anchored. In developed economies, inflation is decelerating as producer prices have declined. Inflation edged up in Russia and India but remains low; however, observers are watching inflation in Russia closely.
On July 26, the Federal Reserve raised the interest rate paid on reserve balances to 5.4%. Fed officials also increased the federal funds rate with a target range of 5.25% to 5.5%. This was the 11th rate increase since March 2022. However, this latest meeting was notable for being the first at which Fed staff have not forecast a recession since they began to increase rates last spring. In June, the European Central Bank increased its key interest rate to 3.5%, a jump of 25 basis points, and revised its inflation projections slightly upward to 5.4% (one percentage point) in 2023. The Bank of England raised its policy rate by 50 basis points to 5% in June.
In the US, real GDP increased at an annual rate of 2.4% in the second quarter of 2023 (annualized quarter-over-quarter growth), according to the “advance” estimate from the Bureau of Economic Analysis. Eurozone GDP expanded by 0.3% in the second quarter, up 0.6% from a year earlier. Across major EU economies, performance was mixed: France and Spain grew thanks to stronger exports and tourism, while Germany’s GDP was flat, and Italy suffered a contraction. UK GDP growth is expected to be modest at 0.3% in 2023, according to the OECD’s June 2023 outlook. China’s GDP in the second quarter expanded by 6.3% year over year (YoY) (4.5% in the first quarter), from a low base in 2022, and reported 5.5% year-to-date growth. Meanwhile, the OECD’s composite leading indicators showed signs of a rebound across economies.
The US industrial production index declined slightly in June to 102 (from 103 in May), while US purchasing managers’ indexes (PMIs) also fell in June: the manufacturing PMI reached a six-month low of 46.3 (from 48.4 in May), while the services PMI dropped to 54.4 (versus a May 2021 high of 70.4). Globally, the manufacturing sector contracted faster in June, with manufacturers either recording a slowdown or accelerating contraction in the business. By contrast, the upturn in services continued in June, although the expansion lost impetus with some visible slowdown.
The labor market remains tight in many countries, with unemployment rates stable across most surveyed economies, although seasonal factors pushed up the rate in India, where unemployment rose to 8.5% in June (from 7.7% in May). US unemployment edged up to 3.6%, slightly higher than May’s 3.4%. (It was 3.5% in January 2020.)
Equity markets in India, Japan, and the US extended gains from June into July, while other surveyed countries remained broadly unchanged (such as Germany and Russia) or recorded further declines (such as China, France, and the UK). In June, year-to-date returns for the S&P 500 and the Dow Jones were up to 15.9% and 3.8%, respectively. During this month, the CBOE Volatility Index averaged 13.3, signaling a stable financial market. The US dollar depreciated against major developed countries’ currencies but performed well against developing economies’ currencies.
In April, world trade volumes fell 1.4% on a monthly basis (from a drop of 1.9% in March, revised), mainly explained by decreases in emerging economies. Exports in May increased in the eurozone (reducing the trade deficit to –€0.3 billion from –€11.9 billion in April) and in Brazil, but they decreased for China and Russia. Imports fell for Russia and the US but rose for Brazil and China. In May, the Container Throughput Index increased by 123.4 points compared with the previous month (122.3 points revised). European throughput continues to fall as Chinese ports continue to strengthen. Meanwhile, global supply chain pressures are close to their lowest since 1998.
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Finally, the nature of work has been changing since the onset of the pandemic—not only in terms of what people do but also where they do it. Demand for office and retail space in so-called superstar cities (including Beijing, Houston, London, Munich, New York City, Paris, San Francisco, Shanghai, and Tokyo) is likely to remain below prepandemic levels, according to a new report from the McKinsey Global Institute (MGI). In a moderate scenario modeled by MGI, demand for office space will be 13% lower in 2030 than it was in 2019 for the median city in the study. In a severe scenario, demand falls by 38% in the most heavily affected city.
Why is this? Employees now spend far less time in the office than they did before the COVID-19 pandemic. In early 2020, the onset of remote and hybrid models of working saw office attendance drop by up to 90%.1 With hybrid work here to stay, office attendance in superstar cities remains down by an average of 30%, with office workers attending the office on average 3.5 days a week as of October 2022 (ranging from 3.1 days in London to 3.9 days in Beijing).
The ripple effects have been significant, with residents leaving urban centers and shopping elsewhere. New York City’s urban core lost 5% of its population from mid-2020 to mid-2022, while San Francisco’s lost 6%. At the same time, foot traffic near stores in metropolitan areas remains 10 to 20% below prepandemic levels.
That said, demand for real estate will vary significantly according to individual cities’ specific local characteristics. Demand may be lower in neighborhoods and cities characterized by dense office space, expensive housing, and large employers in the knowledge economy. However, cities can adopt hybrid approaches to help them adapt and thrive. Priorities might include developing mixed-use neighborhoods, constructing more adaptable buildings, and designing multiuse office and retail space.
In the advanced economies, the US grew at 2.4% in the second quarter, but European growth is modest. Consumer price inflation is dropping, and manufacturing remains subdued.
United States. In the US, real GDP increased at an annual rate of 2.4% in the second quarter of 2023 (annualized quarter-over-quarter growth), according to the “advance” estimate from the Bureau of Economic Analysis. Meanwhile, real GDP grew at an annual rate of 2.0% in the first quarter of 2023, according to the “third” estimate released by the Bureau of Economic Analysis. The latest Fed Beige Book indicates a positive outlook for the US economy.
Eurozone. Eurozone GDP returned to growth in the second quarter, expanding 0.3%, and up 0.6% from a year earlier, with the impact of supply bottlenecks and energy shocks waning and real incomes recovering—but the manufacturing outlook is worsening. Across major EU economies, performance was mixed: France and Spain grew because of stronger exports and tourism, while Germany’s GDP was flat and Italy contracted. The eurozone narrowly avoided a technical recession around the turn of the year, preliminary data showed.
United Kingdom. UK inflation dropped to 7.9% in June (from 8.7% in May), while core inflation (which excludes the price of energy, food, alcohol, and tobacco) fell slightly to 6.9% (from 7.1% in May). This indicates that UK inflation is increasingly driven by domestic factors, not simply by rises in energy prices due to the war in Ukraine. The falling inflation rate is principally the result of a drop in transport costs, particularly fuels, and a slower rise in food and beverage prices. The rapid pace of price rises in the UK has been more persistent than in other big economies, with inflation running at the highest level in the G-7. In response, the Bank of England increased its policy rate by 50 basis points to 5% in June and is forecast to raise rates further before the end of 2023. Inflation is expected to drop to 5% by the end of 2023 (versus 4% as previously predicted).
In the emerging economies, China’s growth slowed, with expectations down. Inflation is under control but edging up in India and accelerating in Russia.
China. In the second quarter, China’s GDP expanded by 6.3% YoY (from 4.5% in the first quarter), from a low base in 2022, and saw 5.5% year-to-date growth (exhibit). Consumption was the biggest driver, contributing 84.5% of GDP growth in the second quarter, followed by investment (32.8%) and trade (–17.3%). By sector, GDP growth in the industrial and services sectors accelerated to 5.2% and 7.4%, respectively, in the second quarter, up from 3.3% and 5.4%, respectively, during the first three months; agriculture GDP growth remained unchanged at 3.7%.
Cross-border trade fell further in the second quarter, declining 6.0% YoY (compared with a decline of 2.7% in the first quarter). Exports dropped 5.4% in the second quarter (after being up 0.1% in the first quarter), while imports were down 7.0% (compared with –6.2% in the first quarter). Financial institutions revised down their latest projections for China’s 2023 whole-year GDP growth: expectations are now 5.0 to 5.5% versus 5.5 to 6.5% in April’s forecast.
India. The purchasing managers’ index for manufacturing dropped from its 31-month high to stand at 57.8 in June (from 58.7 in May) but remained solidly in the expansion zone. Services followed a similar trend, posting a month-over-month decline of 4.4% to stand at 58.5.
Exports decreased by 22% on an annual basis in June, totaling $32.97 billion, amid global demand challenges. June’s merchandise exports figure represents a 6% decline from May’s total of $34.98 billion. At $53.10 billion, June imports were down 17% from one year earlier, also following a similar month-over-month trend to post a 7% decrease from May. This was attributable to easing of commodity prices. The trade deficit decreased.
Brazil. Consumer confidence increased to 92.3 in June (from 88.2 in May), the highest reading since February 2019. The indicator measuring intention to purchase durable goods in the coming months was the main driver of the index for the month, suggesting a reduction in pessimism regarding spending intentions, helped by easing inflation and the expectation of future interest rate cuts. Industrial production in Brazil increased 1.9% in May 2023 over May 2022.
Russia. At its June policy meeting, the Central Bank of the Russian Federation acknowledged inflation was accelerating again, from low levels. The bank expects consumer prices to rise by 4.5 to 6.5% this year and for inflation to subside to the 4.0% target in 2024. The bank mentions several factors increasing inflationary pressures, potentially justifying another rate-hiking cycle: currency depreciation, fiscal expansion, a tight labor market, and potential extension of sanctions. Consensus estimates from major international forecasters currently run in the range of 5.0 to 6.5 % for this year and 4.0 to 5.0% for 2024.
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 July 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 reports are 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.
