Consumers are generally feeling more positive (Exhibit 1) as inflation stabilizes across economies, though spending growth in most countries has declined. However, inflation remains stubbornly persistent in some countries, such as the United Kingdom; by contrast, it is ameliorating in Brazil and India and is now at 0.1% in China, prompting deflation worries. In general, headline inflation among developed economies has eased, but core inflation remains high. Eurozone inflation was marginally up at 7.0% in April (6.9% in March), driven mainly by food price inflation (13.5% in April), while UK inflation declined by less than expected but dropped into single figures for the first time since summer 2022.
Central banks are aiming to sustain pressure on inflation by maintaining interest rate levels or raising them (Exhibit 2). The Federal Reserve raised the interest rate paid on reserve balances to 5.2%. Federal Reserve officials decided to maintain the target range for the federal funds rate at 5.0 to 5.25%. Given the strong job market, plentiful job openings, and stable expectations, Federal Open Market Committee (FOMC) officials are more optimistic about achieving a soft landing. The Bank of England raised its policy rate by 50 basis points to 4.5% on May 11 and is anticipated to raise rates above 5.0% before the end of 2023. In a similar spirit, the European Central Bank (ECB) also increased its key interest rate to 3.25%, a hike of 25 basis points. However, opposition to higher interest rates from businesses and consumers is gaining momentum in many countries. The Brazil central bank’s decision to maintain the key Selic rate steady at 13.75% (currently one of the highest real interest rates globally) has been questioned by the Brazilian government.
According to the OECD’s composite leading indicator, the economic situation in the next three months will worsen across all countries except the United Kingdom, where recovery continues. Flash estimates for eurozone GDP growth show that the first quarter of 2023 was barely positive (0.1%) compared with the previous quarter but up by 1.3% on the same period in the previous year. The widely anticipated recession has not materialized so far, although there is significant year-on-year growth disparity, ranging from +6.4% (Ireland) to –3.7% (Lithuania) (Exhibit 3).
The global services sector recorded strong growth in March, while the manufacturing sector contracted further. Manufacturing faces headwinds from soft global demand: new orders, stocks of purchases, and delivery times point toward contraction. Across countries, the story looks very similar: services remain more robust than manufacturing. In the United States, the purchasing managers’ index (PMI) for manufacturing increased to 49.3 in March (47.3 in February); the services PMI rose to 52.6 (70.4 in May 2021). In Europe, the manufacturing PMI reached 53.3 in the flash estimate for May (54.1 in April), a three-month low. The services PMI broke into expansion territory in January (50.8) and leveled off in May (55.9). In India, the April PMIs for both manufacturing and services remained solidly in expansion territory at 57.2 (56.4 in March) and at 62 (57.8 in March) respectively. Brazil’s manufacturing PMI extended its downturn, dropping to 44.3 in April from 47.0 in March; the services PMI expanded to 54.5 in April from 51.8 in March, signaling a second successive upturn.
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A tight labor market continues in many areas, with declining unemployment rates in the United States, China, the eurozone, and Russia. The United States has reported that its labor force was up by approximately 1,161,000 in April from March 2020, with the number of women returning to work boosting female labor force participation to pre-pandemic levels.
Stock markets recorded solid growth in April; most of them extended gains through May. On the US equities markets in April, both the S&P 500 and the Dow Jones were up—by 1.5% and 2.6%, respectively. European equities recovered from the Credit Suisse takeover, with the Eurostoxx 600 index standing at 5.0% below its January 2022 peak.
In March, world trade volumes increased 1.5% on a monthly basis (–0.8% in February revised)—mainly explained by increases in emerging economies. In March, the Container Throughput Index fell slightly, to 118.1 points, compared with the previous month (118.6 points revised). China’s ports were busier, and exports increased for China and Brazil. That said, China cross-border trade expanded more slowly at 1.1% in April (7.4% in March). Exports growth decelerated to 8.5% year on year in April (14.8% in March), while imports slowed by –7.9% (–1.4% in March). In India, April merchandise exports recorded a 10% decline over March’s total of $38.38 billion.
Current tremors in the financial system may signal a shift in how the world borrows, lends, and accrues value, according to a new report from the McKinsey Global Institute. The future of wealth and growth hangs in the balance finds that asset price inflation over the past two decades has created about $160 trillion in “paper wealth.” However, economic growth was sluggish, inequality rose, and every $1.00 in investment generated $1.90 in debt. The report sets out four plausible economic scenarios to 2030: three are far from ideal; only one scenario is positive, combining strong growth in income, wealth, and balance sheet health, if economies can accelerate productivity so that growth catches up with the balance sheet.
In the advanced economies, central banks raise policy rates as inflation stubbornly persists. Stock markets were brighter. Sentiment in manufacturing remains subdued but is more buoyant in services.
United States. The unemployment rate stands at 3.4%, slightly lower than March’s 3.5% (3.5% in January 2020), with approximately 3.8 million more unfilled positions than unemployed people (exhibit). Total nonfarm payroll employment has added some 253,000 net new jobs in March. New unemployment claims have returned to pre-pandemic levels, at about 242,000 new claims per week. The labor force is up by approximately 1,161,000 from March 2020 (986,000 men and 175,000 women).
Eurozone. While industrial activity has been less negative in the eurozone lately, this month’s data saw a “bump in the road.” The purchasing managers’ index (PMI) for manufacturing reached 53.3 in the flash estimate for May (54.1 in April), a three-month low. The services PMI broke into expansion territory in January (50.8) and leveled off in May (55.9). The industrial production index has measured growth over 2021 since August, although it fell substantially in March.
United Kingdom. According to the Bank of England’s May 2023 Monetary Policy Report, consumer price index (CPI) inflation is expected to decline less rapidly than predicted in February’s report, due to strong food prices and demand growth. However, increasing economic slack and declining external pressures will lead CPI to fall below the 2% target, to slightly above 1% in two to three years. UK GDP growth is expected to be stronger than in the February report, despite high interest rates, reflecting stronger global growth, lower energy prices, the fiscal support announced in the Spring Budget, and lower precautionary savings by households.
In the emerging economies, inflation is subsiding. Trade is sending mixed signals. Services PMIs outshine manufacturing.
China. Industrial output grew 5.6% year on year in April (3.9% in March), but the accelerated expansion was mainly due to a low-base effect. Compared with the same period in 2021, total industrial output increased 2.5% in April (9.1% in March); output in the mining sector rose 9.5% in April (13.2% in March); output in the manufacturing sector expanded 1.6% in April (8.8% in March); and output in the utility sector increased 6.4% in April (10.0% in March).
India. The Reserve Bank of India (RBI) has successfully achieved its tolerance band limit for CPI inflation, which declined from a peak of 7.8% in April 2022 to 4.7% in April 2023. As reported by the reserve bank, in the first quarter of 2023–24, growth is expected to be driven by private consumption (supported by reviving rural demand) and renewed buoyancy in manufacturing following easing of input-cost pressures. The key RBI policy rate (repo rate) stands at 6.5% and has seen no change since the prior month.
Brazil. Brazil’s purchasing managers’ index for manufacturing extended its downturn, dropping to 44.3 in April from 47.0 in March. Firms reported postponement of client orders, reduced purchasing power among households, weak underlying demand, and uncertainty surrounding public policies as weighing on the performance of the sector. The services PMI expanded to 54.5 in April from 51.8 in March, signaling a second successive upturn in output.
Russia. According to preliminary data, Russian GDP contracted in January–March by 2% year on year. Russian industrial output remains resilient, returning to growth and supported by state orders, including for national defense. Consumer sector weakness persists, as retail sales declined by 5.1% in March, following a 7.7% deterioration in February. Consumer demand remains weak as heightened uncertainty prompts propensity to save.
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