Take Two: World Bank and OECD raise 2023 growth forecasts; Eurozone in recession

What do you need to know?

The global economic growth outlook for this year has improved slightly, though elevated interest rates will weigh on 2024, according to the World Bank and the Organisation for Economic Co-operation and Development (OECD). The World Bank raised its 2023 growth expectation to 2.1% from 1.7% in January but cut its 2024 prediction to 2.4% from 2.7%. The OECD lifted its view to 2.7% from March’s 2.6% prediction, citing the re-opening of China and lower energy prices, and kept its 2024 forecast unchanged at 2.9%. However, the improved forecasts represent a sharp slowdown on the 3.1% and 3.3% growth reported by the World Bank and OECD respectively for 2022.

Around the world

The Eurozone entered recession in the first quarter (Q1), according to revised official figures. Original estimates for flat growth in Q4 and +0.1% in Q1 were both cut to -0.1%, partly due to revised German data. A recession is often characterised as at least two successive quarters of contraction. Earlier in the week, European Central Bank (ECB) President Christine Lagarde said there were “signs of moderation” in Eurozone core inflation, which strips out food and fuel prices. However, she added there was “no clear evidence that underlying inflation has peaked”, hardening market expectations for a fresh rate increase this week.

Figure in focus: 25 basis points

The Bank of Canada (BoC) and the Reserve Bank of Australia (RBA) both surprised markets with 25-basis-point (bp) rate hikes. The BoC raised its overnight rate to a 22-year high of 4.75%, while the RBA moved its cash rate to 4.1% – an 11-year high. Both cited stickiness in recent inflation indicators among other factors. Elsewhere, the US S&P 500 index reached a level 20% above its 2022 low – a move sometimes taken to signify the start of a bull market. The mood was softened a little by the rate hikes in Canada and Australia which diminished confidence that the Federal Reserve (Fed) would pause its own rate hiking cycle this week.

Words of wisdom:

New Capitalism: An economic programme created by Japan’s government which aims to boost growth and distribute wealth. Its strategy to deliver this “new capitalism” includes investing in technology and innovation, start-ups and other measures to help drive its digital and green transition. The plan is expected to be approved later this month, though opponents criticised it for lacking details on wage hikes, social initiatives and tax increases. Meanwhile, a final estimate revealed better-than-expected GDP growth for Japan in Q1, at an annualised 2.7% from a preliminary estimate of 1.6% and 0.4% the previous quarter, driven by strong domestic spending.

What’s coming up

Monetary policy will be the primary focus in the week ahead. Wednesday sees the Fed meet to decide on interest rates – at May’s gathering officials unanimously voted on a 25bp hike to a range of 5%-5.25% but some were “less certain” about the need for tightening. The ECB meanwhile convenes on Thursday – at its previous meeting it raised its key interest rates by 25bp to 3.25%. Elsewhere, the UK publishes its unemployment data for April on Tuesday, when US inflation numbers are also released – the annual rate dropped to 4.9% in April, its lowest in two years. The UK also posts April’s GDP data on Wednesday. On Friday Eurozone inflation numbers are posted; during May price rises eased to 6.1% down from 7% in April.