22 Sep 2023
Divergence is still the key theme in the global economic data – with services faring much better than manufacturing (although services may be starting to cool, too). In a similar vein, inflationary pressures are hanging around in Europe, but we have seen some much more encouraging data in the US, in Latin America and across Asia as central bankers in those regions mull over whether to stop tightening or (in some cases) have already started easing policy.
The much-anticipated US recession hasn’t come, at least yet, with the economy looking like it may have even accelerated in Q3 on the back of early data (Chart 1), following on from broadly decent readings through the second quarter. Recessions continue to be avoided in Europe, too, although the recent survey data there have taken a turn for the worse and the manufacturing side of the economy remains weak (Chart 2).
Keeping with the theme of softer data, the recovery in mainland China has slowed further (Chart 3), led by weakness in the property sector and the manufacturing and trade data. Consumer spending on services continues to recover quickly (Chart 4), but the weakness in the labour market may hold back any subsequent momentum. The broader weakness in global trade will be playing a role here, but there are some tentative signs of a turn in some leading indicators in this space.
So much will come down to developments in the labour market, which in the rest of the world is holding up. Unemployment rates are yet to pick up meaningfully and jobs remain plentiful. Wage growth remains high in Europe, notably the UK, which may be contributing to some of the stickiness in services inflation.
In the US, nominal wage growth has settled just above 4%, but with dropping inflation, real wages are now rising – giving support to consumer demand. Despite this, recent inflation prints have been more promising, with underlying prices hardly rising and with rental inflation set to slow in the coming months (Chart 5), overall core CPI (Chart 6) and personal consumption expenditure inflation readings should head towards the Federal Reserve’s target.
But, importantly, not all the way there. Central banks are continuing to balance the risks. On one hand, inflation could become more entrenched, if tightening is stopped or reversed too early. On the other, the risks of overtightening are still there, with much of the global economy yet to show clear signs of higher rates biting.
So, while the data suggest that a soft landing is now looking possible, with inflation coming down and growth cooling, not collapsing, the risks of something harder are still there.
1. This report is dated as at 15 September 2023.
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