Central banks caught between strong data and tense markets

  • Global: We forecast global GDP growth of 2.4% this year and 3.0% next year, below its  pre-pandemic average rate. Indicators of economic activity have been somewhat more  resilient than expected at the start of the year, including in the US, the eurozone and  China. Still, most of the effects of monetary policy tightening on output have yet to come  through, and recent developments in the banking sector could amplify the tightening of  credit conditions. While core inflation has generally surprised to the upside despite ongoing  improvement in supply chains, we still forecast fairly rapid disinflation this year due to base  effects, lower commodity prices, below-potential growth and softening labor markets.
  • US: Our GDP growth forecasts are broadly unchanged at 0.5% for 2023 and 0.8% for  2024. We still expect a mild recession but delayed by one quarter to 2Q23-3Q23. Strong  data at the start of the year were likely only partly due to unusually warm weather. Going  forward, the reduced stock (and unevenness) of personal “excess savings”, a slowdown in  consumer credit and a weakening labor market will likely weigh on consumption. A  tightening of credit conditions due to banking-sector woes risks amplifying the effects of  monetary tightening. We expect headline CPI inflation to fall rapidly to 3% by year-end and  to 2% by mid-2024, in large part due to the housing component. PCE inflation will probably  be stickier. The Fed is almost done with rate hikes: we expect a final 25bp increase in May  and 150bp of cuts in 2024.
  • Eurozone: We confirm our forecast that GDP will expand by 0.5% this year and by 1.0% in  2024, as recent stronger-than-expected data for activity and the labor market offset some  of the looming risk from financial market tensions and a weakening in the credit cycle.  Headline inflation is on a downward trajectory while core inflation should peak soon. The  ECB retains a tightening bias, but market tensions are likely to accelerate the transmission  of monetary policy, hence reducing the need for rate hikes. We are lowering by 25bp the  expected trajectory for the deposit rate, envisaging three 25bp increases (in May, June and  July) and a peak at 3.75%. We continue to expect 75bp of rate cuts starting in mid-2024.
  • CEE: In EU-CEE1, we forecast GDP growth of 0.9% in 2023 and 3.6% in 2024, with most  countries avoiding a technical recession. In Turkey, we expect growth of 2.9% in 2023 and  3.7% in 2024, with an orderly tightening of financial conditions if the opposition wins the  elections scheduled for 14 May. Inflation might not fall fast enough in 2023-24 to return  inflation to target. As a result, we forecast rate cuts this year only in Czechia and Hungary.
  • UK: GDP is likely to contract by 0.4% in 2023 and to rise by 0.5% in 2024. This includes a  mild recession lasting for most of this year, mainly driven by tight monetary policy.  Headline CPI inflation is set to fall rapidly, mostly on account of lower energy prices. While  the labor market remains tight, private sector regular pay growth has eased significantly.  We forecast the MPC is done with rate hikes and will cut by 100bp in 2024.
  • China: We confirm our GDP growth forecast of 4.9% for 2023 – broadly in line with the  new official growth target of “around 5%” – and 4.7% for 2024. Chinese consumers are  expected to be leading the recovery after a prolonged period of spending suppression due  to measures to contain COVID-19 infections. On the policy front, the leadership of the  Chinese Communist Party reiterated that no major stimulus is in the pipeline. However,  both fiscal and monetary policy are likely to remain supportive

Source: UniCredit Research - UniCredit Economics Chartbook, 29 March 2023, Executive summary

1 EU-CEE refers to CEE countries that are members of the EU: Bulgaria, Croatia, Czechia, Hungary, Poland, Romania, Slovakia and Slovenia