Despite improvements in several key measures, a heightened recession risk persists
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.
Though US GDP growth surprised to the upside in the fourth quarter, at 3.1% year over year, 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. And US inflation, which peaked at 9.1% in June 2022, jumped slightly from 3.1% year over year in November to 3.4% in December.
The structural challenges facing Europe—from an aging population to high energy prices—present meaningful headwinds with no clear resolution in sight. The eurozone’s growth rate continues to slow, with fourth-quarter GDP growth coming in at 0.1% year over year (and less than 0.1% growth in total since the third quarter of 2022). Eurozone inflation jumped slightly, from 2.4% in November to 2.9% in December, suggesting it may be difficult for inflation to return to target levels of around 2%. The UK is also having trouble bringing inflation under control: The Consumer Price Index (CPI), including owner occupiers’ housing costs, has remained steady at 4.2% for the past two months, alongside 0.3% year-over-year third-quarter GDP growth (with less than 0.3% growth in total since the third quarter of 2022).
After a rapid series of interest rate increases to tame inflation, the central banks of the US, UK, and eurozone have paused rate hikes for now, given declines in the regions’ respective consumer price indices from their 2022 peaks. But central bankers remain wary, and they may keep interest rates high for some time. The US Federal Reserve kept interest rates unchanged in its January meeting, suggesting that it needed further progress on reducing inflation to its 2% target before cuts would take place. The Bank of England also paused rate increases in December and is expected to keep rates the same in its February meeting. The European Central Bank kept rates steady in its January meeting as well. The effects of these higher rates and the uncertainty around how long they will last continue to impact the global economy.
In the Asia-Pacific region, China’s growth remains slow, despite recent small stimulus measures. It’s not clear if the economy will significantly rebound after a disappointing post–Covid-19 recovery, shifting government priorities, and structural challenges. China’s inflation—which has been near zero since April 2023—was -0.3% in December, the third consecutive month of deflation. In contrast, Japan has recently seen its highest inflation in four decades, and as of December 2023, its rate is at 2.6% year over year, though the Bank of Japan has maintained negative short-term interest rates. Indian inflation, most recently 5.7% in December, has stayed at the higher end of its range over the last decade but below levels in the early 2010s. Most recently, India’s real GDP growth was 7.6% from July to September 2023, putting it on track to be the fastest growing of any G20 country for 2023.
Given the ongoing war in Ukraine and the evolving conflicts 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 a breakdown in shipping through the Suez Canal or rapidly rising oil prices.
Globally, all the ingredients for continued economic uncertainty remain present. With uncertainty unlikely to dissipate any time soon, it’s critical for companies to prepare for a range of economic and geopolitical scenarios.