Snap Chart
Figure 1
Several key measures indicate a heightened recession risk
Figure 2
Inflation continues to decline across most major economies, with China in deflation
After a year of instability, the global consensus is creeping toward cautious optimism. However, significant uncertainties linger, and the impact of rising interest rates has yet to play out.
The question of whether the US will fall into a recession remains open as the tension between growth and inflation continues to challenge the Federal Reserve. The US 10-year minus 2-year Treasury yield spread has been inverted since July 2022, which is typically indicative of a recession within 12 months, though that spread has been tightening. Inflation reached levels not seen since the 1980s, peaking at 9.1% year over year (YOY) in June 2022. While it remained steady from August to September 2023 at 3.7% YOY, it fell to 3.2% in October, returning close to its level of 3.0% in June 2023.
The structural challenges facing Europe—from demographics to energy—present meaningful headwinds with no clear resolution in sight. The eurozone’s growth rate continues to slow, with third-quarter GDP growth coming in at only 0.1% YOY. However, the flash estimate for inflation in Europe fell significantly, from 4.3% YOY in September to 2.9% YOY in October. In general, the UK is having more difficulty bringing inflation under control; however, the Consumer Price Index (including owner occupiers’ housing costs) fell from 6.3% YOY in September to 4.7% in October.
After a rapid series of interest rate increases to tame inflation, the central banks of the US, UK, and eurozone have largely paused rate hikes for now, given declines in CPI. But central bankers remain wary—they may keep interest rates high for some time, and further rate increases are not out of the question. The US Federal Reserve kept interest rates on hold in its November meeting but left the possibility of raising rates in the future open. The Bank of England also paused rate increases in November, as did the European Central Bank in its October meeting, following 10 consecutive hikes. The effects of these higher rates and the uncertainty around how long they will last are still impacting the economy.
In the Asia-Pacific region, China’s growth remains slow. It’s not clear if it will significantly rebound after a disappointing post–Covid-19 recovery, shifting government priorities, and structural challenges. China’s inflation fell to –0.2% in October and has been near zero since April 2023, entering deflation several times. In contrast, Japan has recently seen its highest inflation in four decades, and as of October 2023, its rate is at 3.3% YOY, though the Bank of Japan has maintained negative short-term interest rates.
Given the ongoing war in Ukraine and the evolving war in the Middle East, companies should stay alert to geopolitical fragility. The possibility of a larger Middle East conflict remains, and its impact could reach across the world, most immediately via oil prices.
Globally, all the ingredients for continued economic fragility and uncertainty are present. The risks of an adverse surprise, financial or geopolitical, remain high. With uncertainty unlikely to dissipate any time soon, it’s critical for companies to prepare for a range of economic and geopolitical scenarios.
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