Despite improvements in several key measures, a heightened recession risk persists
Inflation continues to decline across most major economies, with China in deflation
Outside of Europe, the consensus on the global economy is creeping toward cautious optimism. But significant uncertainties linger.
Though US GDP growth was higher than expected in the fourth quarter, at 3.1% year over year, the US 10-year minus 2-year Treasury yield spread remains inverted (and has been since July 2022), which is typically indicative of a recession within 12 months. US inflation, which peaked at 9.1% in June 2022, fell slightly from 3.4% in December to 3.1% in January, still above the target of around 2%.
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 fell only slightly, from 2.9% in December to 2.8% in January, 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 three months. The UK slipped into a recession in the fourth quarter of 2023, with GDP falling 0.3%, following a 0.1% contraction in the second quarter. According to the Bundesbank, Germany is also likely in recession.
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. The US Federal Reserve kept interest rates unchanged in its January meeting, and while it signaled three cuts this year, it also left the possibility open of raising rates in the future. The Bank of England also kept rates stable in its February meeting, as did the European Central Bank in its January meeting. But central bankers remain wary, and they may keep interest rates high for some time. 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 -0.8% in January, the fourth consecutive month of deflation. In contrast, Japan has recently seen its highest inflation in four decades. As of January, its rate is 2.2% year over year, though the Bank of Japan has maintained negative short-term interest rates. India’s inflation, most recently 5.1% in January, 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 G20 country last year.
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.
Despite the increasingly optimistic consensus view, all the ingredients for continued economic uncertainty and elevated geopolitical risk 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.