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. And inflation dipped slightly from 3.2% YOY in October to 3.1% in November, down from a peak of 9.1% in June 2022.
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 third-quarter GDP growth coming in at 0.0% YOY (after revision). Partially due to this slowdown, inflation in Europe fell significantly, from 4.3% YOY in September to an estimated 2.4% YOY in November. In general, the UK is having more difficulty bringing inflation under control, alongside low GDP growth. However, the Consumer Prices 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 slower inflation. The US Federal Reserve kept interest rates on hold in its December meeting, and while they signaled three cuts next year, they also left the possibility of raising rates in the future open. The Bank of England also paused rate increases in December, as did the European Central Bank, following 10 consecutive hikes. 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. 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 fell to –0.5% in November 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 a breakdown in shipping through the Suez Canal or rapidly rising 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.