Global Growth Outlook: Global economy running out of steam

GLOBAL GROWTH OUTLOOK

Global economy running out of steam

GLOBAL GROWTH OUTLOOK

Growth weak and unequal

Juni 2022

▪ Global economic output is set to grow around 2.7 percent. This is more than one percentage point below trend. South-East Asia is on track for average growth, while the euro area economy recovers gradually and the United States heads for a low. The United Kingdom will narrowly avert recession.

▪ Industrial production and global trade off to a weak start in the year. We expect global trade to grow by a moderate two percent and a lull in industrial production across industrialised countries and China.

▪ Global inflation should drop from seven percent this year to five percent next year. Industrialised countries likely to get inflation down to under five percent this year already.

Die amerikanische Lokomotive der Weltwirtschaft Aufschwung im Norden, Risiken im Süden

▪ United States has largely completed monetary tightening and the euro area is close behind. Monetary tightening is having the intended impact, steeply toughening financing terms and conditions, and curbing demand.

▪ Fiscal policy of most countries now focused on moderate budget consolidation. Deficits are being shaved by a good half a percentage point of economic output, supporting the monetary stance

▪ Deeper structural reform needed around the world to open up new opportunities for growth. Climate and industrial policy must be more ambitious.

▪ Germany languishing. The German economy is likely to stagnate this year. Consumption expenditure and investment levels are both downward, with net exports pulling the other way.

Transatlantic resilience, Asian recovery

The course of global economic development so far this year has exceeded turn-of-the-year expectations. Europe successfully headed off a major recession that would, in earlier times, have been unavoidable after such a huge energy price shock. The euro area nonetheless experienced a technical recession during the fourth quarter of last year and the first quarter of this year. The US economy has remained resilient. After aweak start to the year, it may well take a step back over the next two to three quarters but should still manage to turn in slim positive growth for the year overall. Combating inflation is a high priority for both economic regions and efforts should start to show effect and stabilise price levels by 2024/2025.

The abandonment of the zero-Covid strategy and the end of the one-off pandemic wave in China has removed a major blockage to private consumption in the country. Catch-up purchases and normalisation should lead to stronger growth down the line. Activity on the property market is also picking up again. Japan continues to display moderate growth, while the other Asian emerging countries are growing robustly. Although global trade is lacklustre, the massive disruptions to international supply chains and transport routes that beset the system during the pandemic and in the first few months of the war are largely a thing of the past. Furthermore, the prices for oil, gas and many other commodities have dropped far below their peak levels. The shortage of semi-conductors has also eased up.

Impact from the multiple shocks continues

Several factors will continue to have a tangible downward impact on economic activity this year and the next, including high inflation, the steep interest rate hikes of the central banks, and the tougher terms and conditions for corporate financing. This is the unavoidable consequence of efforts to get inflation back down to the level targeted by the central banks. The fiscal policy of the major economies is also largely geared towards getting inflation down. Prospects going forward are additionally encumbered by high uncertainty surrounding Russia’s war of aggression against Ukraine and the security situation in East Asia. The financial woes of individual financial institutions in the United States and Switzerland have given rise to uncertainty regarding the true state of the international financial system. Despite concerted action on the part of governments and public authorities, risks remain high

Bleaker growth prospects for global economy

Global economic growth will not reach pre-pandemic levels in the next few years for a number of reasons. These include the rising importance of economic security which will reduce efficiency, the medium-term consequences of inflation and stabilisation policy, the demographic trends in industrialised countries that will tangibly curb growth potential, and the over-indebtedness of many developing and emerging countries which is not likely to be resolved given the conflicts between the People’s Republic of China and western donor countries over the distribution of the adjustment costs amongst creditors. All in all, the global economy is only expected to grow by around three percent in the medium term (IMF 2023).

Global economy running short of steam this year

In the current year, global economic growth is expected to fall below the three percent recorded last year, down to 2.7 percent (see IMF 2023, European Commission 2023, OECD 2023). Next year,

growth should climb back over three percent. Our growth forecast for this year is around half a percentage point higher than it was in the winter. Global production levels are expected to remain well below the long-term average growth rate of 3.75percent (2000-2019), with industrialised countries only set to expand 1.3 percent and developing and emerging countries four percent.

1: IMF (April 2023)

2: OECD (June 2023, *March 2023), Forecast for India for fiscal year beginning April

3: European Commission (May 2023)

4: Forecast on basis of 70 percent world GDP (PPP of 2013)

5: Information on India for the fiscal year in current prices

Deep recessions will be the absolute exception this year among the major economies. Although some developing countries will undergo a brief recession, most industrialised countries will manage to avert one with the possible exception of Sweden. It still remains to be seen whether the US economy will turn downwards in the next few quarters or whether economic activity will stabilise after registering very weak first-quarter growth of 0.25 percent over the previous quarter. We expect to see economic output dropping off slightly in the second half of the year which could still lead to an annual result of one percent over last year. This may not classify as arecession as most of the labour market indicators are still too positive and the monetary tightening has so far had an extremely low impact on unemployment. A positive sign is that key upstream indicators such as the purchasing managers’ index have

improved tangibly among most industrialised countries over the last few months even though industrial indicators remain weak. The business sentiment indicators of the OECD and the European Commission and other national survey-based indicators (such as ifo) have all trended up somewhat over the last few months

Growth of real gross domestic product in 2023 compared to previous year (in percent)

Slight easing on the markets

The main reasons for the brightened situation are very clear. Energy markets have recovered well from the considerable tensions seen in the autumn. Gas wholesale prices in Europe, in particular, had fallen to below 30 euros per megawatt hour at last count. The price of oil is also lower than expected, while electricity still remains very expensive. China has abandoned its zero-Covid policy and swiftly absorbed the economic consequences of the pandemic. Industrialised countries are also proving to be more resilient against the Russia shock (oil, gas, coal, foreign trade in general) than anticipated by rapidly and successfully diversifying their energy suppliers. Furthermore, private households have used much of their savings accumulated during the period of Covid restrictions to catch up on travel and services. As expected, employment levels have emerged largely unscathed thus stabilising consumption expenditure and investment. Even companies did not radically cut down their investment plans and have maintained investment levels unusually steady despite the huge turbulences in costs. The fiscal policy measures introduced in many OECD countries propped up the incomes of both private households and enterprises. In 2023, fiscal policy in Europe and in the United States will be more neutral or even curb activity slightly to stabilise monetary value.

*seasonally adjusted (index=100) Source: Macrobond

Gradual recovery underway

Global economic growth was particularly weak in the fourth quarter 2022, but many economies seem to have bottomed out during this period The first quarter of the new year turned out to be much better than expected six months ago. Although the euro area did not manage to avert a recession altogether, growth should now start to set in gradually. The US economy also continued to grow. China even recorded a robust rise. In general, however, there is no denying that industrial production levels have been moving sideways for a good nine months, with the latest figures showing considerable drops in Japan and Korea, normalisation in China and a slight recovery in the United States and Europe. Retail sales are well up again in China and the United States and on a global level, but still downward in the euro area. Car sales have also moved sideways for more than a year, with stronger growth in Europe, Japan and the United States, and high fluctuations in China (OECD 2023). Investment activity is also likely to stagnate this year in industrialised countries. The slump in construction is currently being offset by rising investment in plant and equipment, and research and development. The consumption expenditure of private households will, in contrast, gradually start to turn up as households are better able to quantify their losses caused by inflation, gradually revert to normal saving levels, and slowly regain their purchasing power with employment and income prospects remaining bright. This process will take some time, however, and probably take until well into 2024.

The United States should manage moderate growth this year overall. The labour market, private consumption and retail sales are very robust, propped up by high savings accumulated during the Covid restrictions. Expenditure on services is gradually returning to its pre-crisis level. There is nonetheless still a tangible risk that the country could slip into a recession in the second half of the year. We expect growth of one percent and a slight increase in unemployment of one percentage point from its current low level. Canada is set to perform slightly better and grow by just under 1.5 percent this year and the next.

Japan is on track for growth of 1.5 percent. The first quarter growth of 0.4 percent over the previous quarter was unexpectedly strong and fuelled by solid consumption expenditure and tourism. Growth should pick up to one percent in 2024. While inflation had reached four percent at last count, it should flatten down to two percent in the further course of the year. South Korea is heading for average growth of 1.5 percent this year and two percent next year. In China, the Communist Party has cautiously put economic growth back on top of its agenda, after unusually weak growth of three percent last year. Growth should climb back up to 5.2 percent this year with catch-up consumption spending by private households, which was very restricted during the zero-Covid strategy, providing the biggest momentum. The property market, industrial production andforeign trade will be slow to recover. Recent monetary easing should kick-start momentum a little. All in all, catch-up consumption and investment should make this year a good one. The political and structural factors weighing down on growth will nonetheless move to the foreground in the medium term. India is expected to grow by six percent, which is at the lower end of the range seen here in the last few years. The ASEAN countries are on line to grow by 4.5 percent

Economic growth in Latin America will remain relatively weak, at below two percent (Brazil just over one percent), and average in the Middle East, at three percent Sub-Saharan Africa is only set to grow by 3.5 percent, while South Africa is in for stagnation. Russia’s economic contraction is likely to reach around two percent once again (much less than expected)

In Europe, the countries in the euro area, in particular, should gradually turn back to growth. We anticipate growth of 0.7 percent this year for both the EU and the euro area. The United Kingdom is currently experiencing a very weak phase but should just be able to avert recession. Sweden, on the other hand, has already plunged into recession driven by the detrimental impact of high energy and financing costs on the property market. On the whole, the concerns making the rounds in autumn of steep wage increases, persistently high energy prices and squeezed earnings have not materialised. Corporate earnings have got back to normal across the EU, wage trends in 2023 and 2024 will largely compensate for the loss in real wages, and energy prices have fallen much more than anticipated (European Commission 2023, Kirkegaard 2023).

Global trade should grow by around two percent this year, down from the five percent growth recorded last year, which was inflated by catch-up demand in the wake of the pandemic Global trade will only expand by two percent this year if activity steps up considerably in the second half of the year, especially as trade volume and freight rates (air and container transport) were downward in the last quarter of 2022 and the first quarter of this year. Industrial production and demand for industrial goods are also wobbling. The reduction of high inventories is also curbing growth. In terms of trade, services are also outpacing industry significantly.

The outlook for 2024 features continued recovery but momentum will remain low, with the euro area (1.5 percent) running ahead of the United States (one percent), while growth in China is set to get back to a normal level of 4.5 percent. Next year, Germany will rise up from being the lowest grower, along with Spain, to a driving force of the major economies. Growth of over 1.5 percent is well within reach. Momentum should gather pace slightly more in 2025, once inflation rates get back to normal and some of the burdening factors start to ease off

Inflation falling slowly but still too high

The outlook for global inflation has improved markedly. The International Monetary Fund expects the global rate of inflation to drop down from 8.7 percent last year to seven percent this year and 4.9 percent next year. Industrialised countries should be able to get inflation down to 4.7 percent before the end of this year and down to 2.6 percent next year. Inflation peaked in the second half of 2022 in both industrialised and emerging countries, and key indicators have improved considerably since. Inflation forecasts have also been downwardly adjusted significantly. Commodity, import and producer prices are decreasing across the board, with the exception of food which has not yet seen a sweeping improvement. Overall, core inflation (excluding food and energy) has not experienced a major adjustment yet but is likely to in the next few months. The IMF forecasts core inflation of 6.2 percent this year and a little over four percent in 2024. In individual countries, the prices for services are still rising with demand increasing after turbulences shifting trends towards goods shifts back and wage rises affecting the costs of services more than the costs of goods. The adjustment of profit margins will also take several quarters to take effect (OECD 2023). Inflation will, in general, not get back down to the target levels of the central banks in the United States, the euro area and the United Kingdom until well into 2025 and 2026. A significant reduction in the monthly inflation rates would, especially at the beginning, have a positive impact on economic development.

Monetary tightening reaching peak

The monetary tightening cycle should be largely completed in the United States, the euro area and the United Kingdom by the summer. Key interest rates are on track to settle down at around 5.25 percent in the United States and 3.75 percent in the euro area (ECB, deposit rate) and remain at that level for several quarters. In the United Kingdom, monetary tightening still has some way to go, particularly as, in contrast to the euro area, inflation was surprisingly high recently, hitting 8.7 percent in April. The financial markets are expecting a key interest rate of over five percent.

In Japan, inflation rates were nowhere near as high and no monetary policy action was taken. In China, the central bank has already loosened its monetary policy in response to the normal inflation rates of two percent and weak economic momentum In general, the majority of central banks in industrialised countries experiencing high inflation will have to extend monetary tightening until inflation rates drop and stay down

The US Federal Reserve should reach its peak of monetary tightening soon. The latest bank turbulences were clearly the result of inadequate supervision of medium-sized banks (conventional bank runs triggered by bad interest rate risk management) and have contributed tomaking the lending practice of similar banks more conservative and financing conditions more stringent The Federal Reserve’s monetary stance is already restrictive with a combination of high key interest rates and quantitative tightening (reduction of securities holdings) and does not need to change course. Core inflation already peaked at just over seven percent and has gone back down to five percent (monthly rates). It will probably be sufficient to keep the key interest rate at just over five percent for the next four to five quarters. The inflationary pressure from the labour market has already decreased

Source:

considerably in information and communication technology, construction and property. Inflation on the prices of goods has already dropped to one percentage point, while inflation on services has risen to well over seven percent. Inflation in the United States should drop down to three percent by the end of 2024 before approximating the target level of around two percent in 2025.

The most recent interest rate hike of the ECB was by 0.35 percentage points on 15 June, bringing deposit interest up to 3.5 percent. In conjunction with further steps towards monetary normalisation, the termination of bond purchases from the APP late June being one example, the resulting tightening of financing conditions and dampening of demand will need some time to take effect In June, the ECB slightly downwardly adjusted its forecast for growth in the euro area to 0.9 percent (2024: 1 5 percent) and made aslight upward correction toanticipated inflation. It expects inflation tocomein at 5.4percent in 2023 and a median three percent in 2024 In view of these prospects and the reasonable wage rises in the euro area(about 5.3percent increase in nominal wages in 2023, 4.4 percent in 2024, 3.6 percent in 2025, according to the ECB), we are not likely to see a further major wage-price spiral. Real wages will already gradually rise in the further course of the year and regain some lost ground by the end of 2024

Fiscal policy oriented towards moderate consolidation around the world

The fiscal policy of most major industrialised countries will target consolidation in 2023 and 2024 as the one-off expenditures to cushion the consequences of thepandemic and theenergy crisis areslowly phased out. The additional revenue generated by higher inflation will push up expenditure somewhat down the line (on social spending, wages and interest servicing), but the overall result will remain positive. In 2022, the governments of most industrialised countries reduced the burden of increased energy costs for citizens and enterprises tosome extent by introducing broad, mostly not very targeted, measures. In Europe alone, the volume of measures just for private households amounted to slightly over two percent of economic output This year, the OECD expects such measures to add up to agood half a percentage point of economic output on average in OECD countries, and to more than two percent in some parts of the EU. Many of the measures are scheduled to end in 2024 at the latest or to focus more on vulnerable groups and use less funds as the purchase prices for energy commodities have already decreased considerably and these lower prices should gradually bring consumer prices down. Expenditure on these measures will thus be substantially lower year on year. Higher wages in the public sector, higher social benefits and increased prices for public procurement will nonetheless cause public expenditure to rise slightly.

Overall, the international organisations expect most industrialised countries to adopt a step-by-step consolidation of public finances and reduce primary deficits (excluding debt servicing) by around half a percentage point of potential growth this year and next year. The United Kingdom is tightening fiscal policy the most, by over one and a half percentage points of economic output in both 2023 and 2024. The United States is set on a moderate course of consolidation this year and the next. In the euro area and the EU, the rate of tightening will be increased successively. Germany is on the upper end, with one percentage point in both years. Japan is likely to adopt a neutral course as the higher expenditure for defence and social benefits will more or less balance out the savings from the termination of measures to combat the pandemic A positive development is that the EU will manage to further increase the level of public investment slightly to over three percent of economic output, on account of the Next Generation EU package The infrastructure and energy regulations in the United States will ensure a similarly high public investment rate. In Japan, public investment is expected to total just over

four percent. These three economic regions will therefore be able to combine consolidation with investment.

The situation in the major emerging countries is very mixed. While Brazil and South Africa will be struggling with rising deficits, India and Indonesia will manage to reduce their deficits. Mexico will face a further setback this year but should be able to consolidate next year. China will largely be moving sideways in fiscal policy in both this year and the next

More expensive corporate financing impeding property investment

Monetary tightening, which is taking place in most economies, necessarily leads to tougher financing conditions for households and private enterprises. Usually, when key interest rates are hiked up, the yields on state and corporate bonds increase considerably, bank lending interest rates accelerate faster thanthe deposit interest rate andthe issuance of bonds and securities is curbed. Inthemortgage markets, interest rate hikes affect new business particularly quickly with knock-on effects on the construction sector and house prices. In the current phase of tightening, monetary policy has a particularly strong impact (OECD 2023) with lending terms for enterprises and households climbing rapidly and solid increases in bond yields. Deposit rates have been quick to follow suit. Short-term corporate loans havereactedmore swiftly than long-term ones, mortgages faster thanconsumer loans, and bonds faster than bank loans

In most countries, lending growth rates have already tailed off substantially and are already downward in some countries with further downward movement on the horizon. In most industrialised countries, the annual growth rates of nominal loans have already decreased by an average of three percent for private households and five percent for corporate loans which is around half the long-term average in both cases. At the same time, demand from both businesses and households for loans to purchase property has dropped deeply and broadly. Inthe United States, lending to non-financial companies has declined substantially according to the latest figures, and, in the United Kingdom and the euro area, mortgages are particularly downward. Construction and real estate both reacted to the new interest rate environment with a very weak performance and investment in these sectors will be curtailed for several years to come. In the euro area and Japan, other types of corporate investment (plant and equipment, research) should remain upward.

It is actually surprising that the current scale of monetary tightening, which is higher than it has been for decades, has not presented a bigger problem to the financing of the real economy in industrialised countries outside of theproperty market but has been absorbed by the market as anecessary hardship that must be endured for several quarters. Companies are gradually adjusting to the new normal in corporate financing. The era of extremely cheap financing is over for the time being. With steeply increasing bond yields, higher interest rates on bank loans and more stringent lending standards, investment financing is returning to more usual conditions. Long-term real interest rates should also return to positive territory in the next two years and lift the target returns for real economy projects

Financial markets adapt to new parameters

The stock markets experienced a substantial correction in 2022. Since the end of last year, the broad indices of industrialised countries have been recovering markedly as the particularly catastrophic downward risks, such as energy shortages in Europe, have not materialised and economic and earnings prospects can consequently be corrected upwards again. Profit margins in most countries

have increased despite the multiple shocks, thus contributing to rising inflation. Indices in the energy and commodity exporting countries have, on the other hand, dropped down again. The main indices have risen by more than ten percent in the euro area, by a good five percent in the United States, and were also upwards in Japan. In Brazil, India and Indonesia, the indices were slightly downward. Russia defied the circumstances and raced upwards, also showing that the Russian economy can withstand the sanctions quite well in the short term.

The yields on bond markets experienced rapid growth before easing off towards the end of the year. The brief phase of financial instabilities in the United States and Switzerland in March 2023 went handin-hand with downward yields, but they have picked up again since. In the last six months, ten-year bond yields rose slightly in the euro area, recorded average growth in Japan, and dropped by a moderate 50 basis points in the United States. In many emerging countries, yields rose along with the interest rate hikes, with wide spreads in places where inflation remained high. While short-term bonds should still increase somewhat until the end of the monetary tightening cycle, long-term bond yields have already settled at a new level. The temporary volatility particularly in high-risk corporate bonds came to an end in spring following heightened risk appetite among investors. Risk premiums on government bonds of highly indebted countries in the euro area have not played a significant role in the last eighteen months, also because the ECB had indicated that it would design and deploy new instruments to secure against such developments.

Furthermore, the external value of the dollar depreciated against major currencies, including the euro. The main factor pushing the dollar down was the monetary tightening in the rest of the world and the bleaker economic prospects of the United States. Currencies that depreciated the most were the Turkish lira caused by inadequate monetary policy and the Argentinian peso. Overall, while volatility did increase temporarily among the major currency markets, in view of the divergent degrees of monetary tightening across the major economies, the situation remained remarkably contained

Euro area USA (S&P 500) China Japan NASDAQ-100

Source: Macrobond

Stock market

Renminbi (right axis) Yen (left axis)

Financial stability secured for the time being but risks remain

Valuation on the financial markets moved in line with thetoughened macroeconomic environment apart from a few undulations. The banking system proved resilient, despite partial difficulties, and is benefiting from the interest rate cycle for the time being Bank stocks were correspondingly strong. Risks nonetheless remain that borrowers, from the property market for example, run into trouble with their repayments and cause a big dent in bank balance sheets and put a lid on macroeconomic growth. It is thus too early to call off the alarms, but the adjustments on the markets in the EU and in Japan particularly have not caused any upheavals yet House prices and office real estate remain a risk for financial and non-financial institutions alike, particularly in the United States (OECD 2023).

Monetary tightening always harbours a certain extent of risks for stability. Key interest rate hikes by central banks increase the financing costs of banks, trigger re-evaluations of financial portfolios and squeeze market liquidity. All these factors tend to increase the volatility of the global financial markets. The recent collapse of regional banks in the United States in March 2023 has increased tensions on the financial markets and exposed weaknesses in the banking sector in the environment of low interest rates, high liquidity and low volatility. To increase their yields, regional banks in the United States exposed themselves to liquidity, duration and credit risks and were not sufficiently prepared for the tight monetary course of the central banks and the disruptions on the financing market. In addition, many banks have a high proportion of fixed-interest government bonds and mortgage-backed bonds with long terms which do not generate higher interest earnings when interest rates rise (IMF 2023). According to the European Commission and the European Central Bank, European banks are only moderately affected by interest risks. The higher refinancing costs and losses in market value of fixedinterest securities have so far been compensated by price adjustments of loan books making banks more profitable and resilient against shocks on account of the higher net interest margins. The equity and liquidity levels of European banks are also well above the minimum requirements (ECB 2023, European Commission 2023).

During the pandemic, households and enterprises around the world were able to build up a financial buffer thanks to fiscal support and monetary easing, making the economy as a whole more resilient against shocks. The high interest rates are now, however, making debt servicing more difficult. The more stringent financing conditions are especially affecting smaller enterprises that do not have many alternative financing options to borrowing. Further compounding the situation are the lower profits in some economies on account of weak demand which increases thedefault risk of borrowers (IMF2023).

The globally increasing interest rates are also making it increasingly difficult for emerging countries to service high debts and deficits even if they have managed to digest the drastic degree of monetary tightening. Since the pandemic, the debt ratio of emerging countries is on a high level. Countries that have been impacted greatly by the high food and energy prices are particularly affected and only have limited fiscal policy space which, in turn, deteriorates their debt sustainability Among the frontier markets (countries whose market economy is smaller, riskier and with a lower liquidity than emerging countries), 37 out of a total of 69 countries are facing debt problems (IMF 2023). The difficult market access, exacerbated by the lower risk willingness following the bank crash in March, is a further weight on the shoulders of emerging countries. The issuance conditions for government hard-currency bonds, particularly for countries with a B rating or worse, have deteriorated. The spreads of government and corporate bonds have widened since October 2022 even though the yields of local-currency government bonds of the most important emerging countries have dropped (IMF 2023, OECD 2023).

Risk premiums of government bonds in foreign currency have gone down again against US government bonds in most emerging countries which indicates that the credit risk for governments is limited so far (OECD 2023). Nonetheless, according to the IMF, twelve emerging countries are currently trading with spreads of more than 1000 basis points and another 20 countries are trading with spreads of more than 700 basis points which is a level at which market access has been very difficult in the past. In 2022, five countries were newly in arrears with servicing their debt (Belarus, Ghana, Malawi, Russia, Sri Lanka), bringing the total number of countries to eight (IMF 2023).

Over the last ten years, China has become the largest lender of many developing countries (Georgia / Pazarbasioglu 2021). As part of its Belt and Road Initiative, China has granted large loans to countries in the global south for infrastructure projects. Since 2017, the volume of loans awarded by China has exceeded the volume of loans granted by the World Bank, the International Monetary Fund, and the member countries of the Paris Club together. Although Chinese lenders often ask for higher interest, they tend to be less risk-adversethan other creditor countries and development banks (Behsudi 2023). Especially highly indebted countries, or those already in default, including Zambia, Ghana, Sri Lanka, Ethiopia and Pakistan, have taken out large loans with China. The West has therefore urged China to grant debt relief to reduce the financial pressure on these countries. China has refused to restructure the debt of these countries and accept losses on these loans as, firstly, the loans are tied to important projects that will bring the borrowing countries positive yields and, secondly, loans grantedby theWorld Bank are also paid back in full (Behsudi 2023). However, full repayment of World Bank loans is essential to maintain the World Bank’s high credit rating so that it can continue to provide favourable financing The heart of the dispute is therefore the distribution of loss in case of default on the part of the borrowing countries. Western countries are calling on China to participate more in easing the pressure on highly indebted countries through debt relief and deferred payments (Economist 2023, Behsudi 2023). Although the Common Framework for Debt Treatments was agreed by the G20 countries including China in November 2020 in an effort to enable a coordinated debt restructuring process for countries unable to pay, no notable results have been achieved so far since the agreement was reached. In view of the strained financial situation of many developing countries, an improvement of the Common Framework is urgently needed. A first step towards reaching an agreement on a restructuring mechanism was reached on 17 May 2023 when the International Monetary Fund signed a rescue package with a volume of three billion euros for insolvent Ghana following agreement by the lenders of the countries of the Paris Club and Chinese lenders to accept losses on loans. Afirst tranche of 600 million euros was disbursed directly (Economist 2023).

Turbulences in the US banking sector

In March 2023, substantial outflows of deposits caused by bad management of interest and liquidity risks of US banks led to turbulenceson thefinancial marketandthecollapseof somebanks. Thetension wastriggeredby theinsolvencyof the Silicon ValleyBank (SVB) on 10 March 2023. The business model of the SVB focused on unsecured loans and other financing tools for venture capital firms and technology companies. Faced with the tight monetary policy, the SVB was unable to effectively manage the interest risks and liquidity risks connected with its securities portfolio and had no effective tools to minimise the risks. After registering net losses, the SVB tried to increase its liquidity by selling securities it held for trading and planned to take out higher loans and an IPO to procure capital. This sparked concerns among investors about the financial situation of SVB and led to an outflow of deposits to the volume of 142 billion dollars in the space of two days which ultimately led to the bank’s collapse. Concerns that this would trigger similar developments among other banks caused the stock prices of some banks to plunge and, once again, fuelled outflows, particularly of unsecured deposits. This development was aggravated by the spread of information through social networks, the option of using online services to move money fast, and the closeknitedness of the banking system The Signature Bank collapsed only two days later, on 12 March. On the same day, theUS Federal Reserveadopted measuresto securedepositsandtheflow of credit to householdsandcompanies.Themost recent collapse was the First Republic Bank on 1 May, which, after a sharp drop in its stock price over March and April, was taken over by JPMorgan Chase with government support

Outside of the United States, Credit Suisse was affected in particular The bank had already drawn attention to itself through a number of failures in the area of risk management, corporate governance and compliance, and had recorded its biggest losses in 2022 since the global financial crisis. In the final quarter of 2022, Credit Suisse also facedhigh outflows of deposits andafalling stockprice. After thebiggestshareholderhadannouncedthatitwouldnotbebuyinganyfurthershares,thebank planned to take up emergency liquidity assistance from the Swiss central bank. This triggered a sharp loss of confidence among investors and caused the stock price to drop further. On 19 March, the UBS finally agreed to takeover Credit Suisse, which was teetering on the edge of insolvency, with support

from the Swiss government

Following the turbulences in March, the global banking sector had largely stabilised by May 2023. The outflow of deposits had got back tonormal even though the lending conditionshave become more stringent. The events in March with an outflow of deposits at a speed that has never been seen before, propelled by social media and online banking, have shown once again how interconnected the banking sector is around the world and the need for more in-depth and more frequent supervision of potentially vulnerable banks.

Global industrial production

Erleichterte Refinanzierung der Banken: die EZB stellt über Vollzuteilung Mittel zu einem Zinssatz von minus 0,5 Prozent bis Juni bereit. Ab Juni setzt dann das dritte langfristige Refinanzierungsprogramm ein (TLTRO 3 = Targeted longterm Refinancing Operations). Dies wird bis zu diesem Zeitpunkt nun günstiger ausgestaltet (bis Juni 2021). Damit lässt sich die Mittelstandsfinanzierung von Banken deutlich leichter sicherstellen. Der

Global industrial production increased by 3.1 percent in 2022, according to figures from the Netherlands Bureau for Economic Policy Analysis (CPB) Growth was thus slightly higher than on average over the last ten years (plus 2 8 percent). After a solid rise in production of 4.5 percent in the first quarter 2022, the pace of growth slowed down in the second quarter, primarily on account of much lower production in China. In the fourth quarter 2022, industrial output was down once again quarter on quarter, with production falling both in advanced and emerging countries.

In the first quarter 2023, industrial production turned up again, rising 1.1 percent above the previous quarter. This growth was fuelled to a large extent by Asian emerging countries including China, which expanded their industrial activities by more than three percent quarter on quarter The development in other regions of the world remained weak. The global purchasing managers’ index for manufacturing has been below the threshold to expansion of 50 points since September 2022. Between March and May 2023, it tread water at 49.6 index points. The prospects for the further course of the year are relatively subdued. We still expect a slight increase in global industrial production of half a percentage point in the year overall.

Advanced economies

In the advanced economies, industrial production in 2022 was higher than in 2019, the year before Covid, for the first time. The good result was mainly attributable to the steep increase in output among other advanced economies Industrial production in this group was up 4.3 percent in 2022 year on year, which is eight percent higher than before the outbreak of the pandemic. Industries in the other developed Asian countries excluding Japan expanded their production by only 1.4 percent in the same period, but this increase lifted output to 14.7 percent above its pre-pandemic level. While industries in the United Kingdom and Japan were still producing 7.3 percent and 5.1 percent less respectively than before the pandemic, the output of US industry was 3.4 percent up year on year but only 0.2 percent above its pre-pandemic level.

In the first quarter 2023, industrial production in the advanced economies was 0.5 percent down on the previous quarter. With the exception of the euro area (up 0 1 percent) and the United Kingdom (stagnation), industrial activity decreased across all groups of countries. The purchasing managers’ index for manufacturing for this group of countries has recovered slightly since the turn of the year 2022/2023 but still recorded a little setback of 0.9 index points in May 2023. The index is still in contractionary territory at 47.6 points. Even though the problems along the global supply chain have eased up, we expect industrial production in the advanced economies to decrease by 0.5 percent due to the negative carryover.

*Production index: two-month average, after calendar and seasonal adjustments, in percent, year on year

Sources: Macrobond, Netherlands Bureau for Economic Policy Analysis, own calculations

World: Industrial production*, Purchasing Managers Index

Emerging countries

Industrial production in the emerging countries recorded solid growth of six percent in the first quarter of 2022. This brought industrial production above its pre-pandemic level in all groups of countries for the first time in two years. The pace of growth tailed off towards the end of the year. The resulting annual growth rate of 3.8 percent was slightly lower than the average over the past ten years (up 4 2 percent). The strongest growth in industrial value added was in the region Africa and the Middle East on account of the high prices for fossil fuels. With an increase of 7.6 percent, the region recorded the highest annual growth in industrial value added in more than 20 years. In the other Asian emerging countries, industrial activity grew 4.4 percent, once again outpacing China which grew 3.6 percent. In Latin America, industrial production increased for the second year in a row, rising this time by 2.6 percent. The weakest performance among emerging countries in 2022 was recorded by the countries of Central and Eastern Europe, where production decreased by 1.5 percent

In the first quarter 2023, industrial production in emerging countries rose by 2.6 percent compared to the previous quarter. Growth was fuelled almost exclusively by a steep increase in industrial activity in the Asian emerging countries. In Central and Eastern European countries, production only inched up minimally. The Africa and Middle East region recorded its second consecutive quarter of downward production The purchasing managers’ index for manufacturing in emerging countries climbed up for the fourth time in a row in February 2023 and, at 51.6 index points, entered into expansionary territory for the first time since August 2022. The index was still in expansionary territory at last count in May. We nonetheless anticipate industrial production in the emerging countries to increase by around one percent on account of the slight negative carryover

other Advanced economies Euro area Japan USA

Purchasing Managers Index seasonally adjusted (left axis)

*Production index: two-month average, after calendar and seasonal adjustments, in percent, year on year

Sources: Macrobond, Netherlands Bureau for Economic Policy Analysis (CPB)

Advanced economies: Industrial production*, Purchasing Managers Index

*Production index: two-month average, after calendar and seasonal adjustments, in percent, year on year

Sources: Macrobond, Netherlands Bureau for Economic Policy Analysis (CPB)

Global trade

Global traderecorded a moderate upward movement after the steep recovery seen in 2021. According to figures from the Netherlands Bureau for Economic Policy Analysis (CPB), the global trade in goods increased 3.2 percent year on year. After stagnating in the first quarter, trade activity picked up momentum and grew 0.6 percent quarter on quarter in the second and 1.1 percent in the third quarter. In the fourth quarter, trade activity then decreased two percent quarter on quarter and, for thefirst time in two years, was also down year on year.

Emerging countries exported 2.9 percent more goods in 2022 overall than in the previous year. With an increase of 10.1 percent, exports from Africa and the Middle East grew the most. Exports from Latin America expanded six percent year on year. For the first time in five years, exports from the other Asian emerging countries (up six percent) outperformed China (down 0.5 percent). Exports from emerging countries in Central and Eastern Europe contracted by a hefty 4.9 percent.

The exports of advanced economies rose by a total of 2.8 percent in 2022 overall. In this group of countries, the largest driver of growth was the United Kingdom which increased exports by 9.7 percent due to the low base level. While almost all regions managed to lift exports by around ten percent in 2021, they stagnated in the United Kingdom. Goods exports from the euro area rose by 4.3 percent year on year and exports from the United States followed a similar trend, increasing 4.2 percent. Exports from the other advanced economies registered a more moderate uptrend of 2.8 percent. While exports from Japan rose 1.2 percent, exports from the other Asian advanced economies dropped 2.1 percent.

Africa/Middle East Latin America

Central and Eastern Europe

Asia (excluding China) China

Purchasing Managers Index seasonally adjusted (left axis)

Emerging economies: Industrial production*, Purchasing Managers Index

World: Exports according to region of origin

Index: two-month average, after calendar and seasonal adjustments, in percent, year on year

Source: Macrobond

The latest figures show global exports stagnating. Exports from the advanced economies fell 1.4 percent compared to the previous quarter. Exports from emerging countries increased by a substantial 2.7 percent over the same period thus compensating for the contraction in exports from the advanced economies. Despite the weak start to the year, we expect the global trade in goods to increase by two percent in 2023 overall.

United States Economic development: is the recession coming?

Despite several factors pulling down growth last year, including the Federal Reserve’s turnaround in interest rates, the tense labour market, China’s zero-Covid strategy and the war in Ukraine, the US economy still managed to recover slightly in the second half of the year, thanks to rising exports and consumption expenditure, amongst other things US GDP grew by 2.1 percent overall in 2022. The start to the new year has been subdued. In the first quarter 2023, US GDP grew at an annualised rate of 1.3 percent according to the second estimate of the Bureau of Economic Analysis (BEA). Growth was fuelled by an increase in consumption spending, exports, federal, state and local government spending, and non-residential fixed investment Offsetting factors were reductions in private inventory investment and residential fixed investments, and increased imports (BEA 2023a).

In June 2023, the OECD forecast GDP growth of 1.6 percent and 0.9 percent for 2023 and 2024 respectively (OECD 2023). The economy will be slowed down primarily by the maintenance of a tight monetary course to combat inflation which will, in turn, curb demand. In April 2023, the International Monetary Fund (IMF) anticipated growth of 1.6 percent this year and 1.1 percent in 2024 (IMF 2023). We expect to see growth of one percent in real terms this year. As long as core inflation, in particular, remains high and the Federal Reserve keeps key interest rates on a high level, the lending conditions will become more stringent and threaten to push the United States into recession. The banking sector also represents a risk as the costs of borrowing money has increased for regional banks since the collapse of the Silicon Valley Bank and the takeover of First Republic Bank by JPMorgan Chase.

The situation on the labour market is sending mixed signals. Unemployment in the country increased from 3.4 percent to 3.7 percent between April and May 2023 (which corresponds to an increase in unemployment of 440,000 people) Still, the unemployment rate remains very low. At the same time, the labour market recorded a surprising growth of 339,000 jobs, mainly in professional and corporate services, the public sector, healthcare, construction, transport and storage and social services. These divergent figures are the results of different methods of calculation. Employers are surveyed to count the number of jobs (Establishment Survey) and households to measure the level of unemployment (Household Survey). In the Establishment Survey, people that have several jobs at the same time are counted more than once because each wage or salary slip is counted individually. The Household Survey, on the other hand, only counts every person once, and establishes whether they are employed or unemployed (BLS 2023a, Ponciano 2023). If unemployment increases according to the Household Survey, that could mean that more self-employed people have become unemployed which are not included in the Establishment Survey. While the number of jobs has increased overall, some large corporations such as Disney, Accenture, Meta and Lyft made substantial cuts to their workforce as a response to the threat of recession and adjustments following the pandemic. Wage increases are slimming down despite a healthy level of new hires (Ponciano 2023, Korn 2023). Therate of unemployment is likely to rise in the next few months as a delayed consequence of monetary tightening. In March, the Federal Reserve’s median forecast for unemployment was 4.5 percent by the end of the year and 4.6 percent by the end of 2024 (Federal Reserve 2023).

Inflation has most recently decreased more steeply than anticipated. According to the Bureau of Labor Statistics, the Consumer Price Index (All Urban Consumers, CPI-U) increased by four percent in May year on year (before seasonal adjustment). Since peaking at 9.1 percent in June 2022, the index has pointed downwards continuously. The seasonally adjusted increase compared to the previous month was a very small at 0.1 percent in May, after a slightly higher rise of 0.4 percent in April (BLS 2023b) Inflation is still too high and far beyond the two-percent target. On 14 June, the Federal Reserve nonetheless decided not to increase interest rates again. Savings are still at an excess level as a

Source: Bureau for Economic Analysis

US GDP growth, quarterly (annualised)

consequence of the pandemic. Personal consumption expenditure increased by a slim 0.8 percent between March and April (BEA 2023b). The savings rate of private households (in percent of disposable income) had increased continuously between September 2022 (three percent) and March 2023 (4 5 percent) before dropping down slightly to 4.1 percent in April (BEA 2023c). The persistently high rate of inflation and worries about a possible default over the last few weeks affected the mood of US consumers. Between April and May, the Consumer Confidence Index of the US Consumer Confidence Survey slipped down from 103 7 to 102 3 points Labour market conditions were rated as deteriorated (The Conference Board 2023). The Index of Consumer Sentiment of the University of Michigan also dropped between April and May, going down from 63.5 points to 59.2 points (University of Michigan 2023).

Slight rise in exports in first quarter 2023

Exports of goods and services dropped in the fourth quarter 2022 comparedto thethird quarter, before turning up again slightly in the first quarter 2023. Imports, which also decreased between the third and fourth quarter 2022, more or less stagnated in thefirst quarter 2023. The United States exported goods and services to the value of 771 billion dollars in the first quarter 2023. That corresponds to a growth of 1.6 percent compared to the fourth quarter 2022. Imports in the first quarter 2023 totalled 972 billion US dollars, representing aminimal 0.02 percent drop comparedtothefourthquarter 2022. Trade deficit (goods and services) in the first quarter 2023 was lower than in the previous quarter on account of the rise in exports, at 201 billion US dollars (BEA 2023d).

Last-minute resolution to budget dispute

The negotiations between US President Biden and the Speaker of theHouse of Representatives, Kevin McCarthy, on increasing the statutory debt ceiling were successfully concluded on 29 May, only days before the US government would have defaulted. On 3 June, President Biden signed the Fiscal Responsibility Act of 2023. The act suspends the current federal debt limit of 31.4 trillion US dollars until 1 January 2025 so that the next debate on the debt limit will take place after the presidential elections in 2024

The Republicans had successfully rallied for cuts in expenditures and caps on the growth of federal discretionary spending in the next few years, though largely excluding defence expenditure. The bill includes the partial rescinding of funding that had already been approved for the Internal Revenue Service and the freezing of unspent Covid relief money. It also terminates the freeze on student loan repayments introduced by the Biden administration as of September 2023. Additionally, the bill expands work requirements for thefood benefit programme SNAP and the welfare program for families TANF. Furthermore, it slackens environmental reviews for fossil and non-fossil fuel energy projects and gives companies more options to participate in the review procedure. It also accelerates the authorisation of the controversial Mountain Valley gas pipeline.

The Congressional Budget Office (CBO) estimates that the Fiscal Responsibility Act will reduce the projected budget deficit between 2023 and 2033 by around 1.5trillion US dollars compared tothe basis projections of May 2023 (CBO 2023a). Before the act, the CBO had projected a cumulative deficit between 2024 and 2033 of 20.2 trillion US dollars (which corresponds to 6.1 percent of GDP) (CBO 2023b). The cuts in spending are too low to curb inflation significantly. The budget deficit and public debt of the United States remain high. The creditworthiness of the United States according totherating agency Fitch is still at the highest possible rating of AAA but has now been put on negative watch

despite the last-minute agreement as repeated political stalemates regarding the debt ceiling and lastminute suspensions weaken confidence (Fitch Ratings 2023).

How Biden sees the role of the United States in the world economy

The United States is increasingly introducing localisation requirements such as ‘Buy American’. Such requirements are included in the infrastructure package of 2021 (Infrastructure Investment and Jobs Act / Bipartisan Infrastructure Law), the Chips Act and in the Inflation Reduction Act. National security is also the top priority in economic policy. In a speech in April 2023, the national security advisor Jake Sullivan outlined the role of the United States in the global economy and in international economic policy as seen by the Biden administration. As the conventional form of globalisation in the form of low tariffs and less state intervention has not led to inclusive growth, their priority is now to reduce dependency on China and generate better jobs for middle class Americans through industrial policy. We will soon see whether this strategy will prove successful. On the one hand, the localisation requirements, the low energy prices and the tax credits from the IRA will likely increase investments flowing into the United States. On the other hand, the subsidies are likely to decrease the competitiveness of the United States in the long run. The trend to domestic production and renewable energy will also contribute to permanent inflationary pressure. The shortage of skilled labour could also put pressure on wages and slow down the green transition. Furthermore, by choosing not to pursue conventional free trade negotiations, the country is not opening up access to new international markets for its enterprises

China

China had a relatively promising start to the year, with GDP growing by 4.5 percent in the first quarter. Restrictions to combat the pandemic had still affected the last three months of 2022, keeping growth in that quarter down to 2.9 percent and three percent in the year overall. After China’s turnaround in its Covid policy at the start of December, the pandemic spread like the wind right into the furthest corners of the country, onthe wings of Spring Festival travel in late January. The economy only started to recover in February.

Consumption was expected to regain lost ground with the increase of travel activity during the Spring Holiday and in the May public holidays. As of 1 May, travel had indeed risen 19.1 percent above its 2019 level A closer look at the figures shows that things are not quite back to normal. Tourists only spent 0.7 percent more than four years ago, revealing a substantial drop in consumption per capita Even after three years of Covid restrictions, consumers are reluctant to spend their money because of grave concerns regarding economic development, the property market and job security. Net exports are also not picking up pace. In view of the low growth inthe United States and Europeand the ongoing geopolitical tensions between China and the West, the prospects for exports remain subdued

The government exercised relative caution in its targets for 2023. At the National People’s Congress in early March, outgoing Premier Li Keqiang announced target growth for GDP of ‘around five percent’ Given the low baseline of 2022 this did not seem to be unrealistically high. However, if economic momentum does not pick up, the scope for expenditure-financed packages to promote investment will be very constricted due to the high level of debt. The Chinese authorities raised their headline budget deficit target to three percent of GDP in 2023 (2022: 2.8 percent) and will issue special purpose bonds of 3.8trillion renminbi (2022: 3 65 trillion renminbi) mainly for local infrastructure projects Other targets include the generation of twelve million new urban jobs and keeping urban unemployment at around

5.5 percent this year. This will be a real challenge given the record number of university students graduating this year (11.6 million).

Upward potential in the service sector and industry

The service sector struggled particularly under the measures imposed to curb the spread of the pandemic. According to the official statistics of the National Bureau of Statistics of China (NBSC), growth in services in the first three months of the year was a moderate 5.4percent year on year overall. Momentum did start to pick up towards the end, with growth of 9.2 percent recorded in March. In April, services expanded by as much as 13.5 percent. In the run up to the surge of travel during the public holidays in May, revenue of hotels and restaurants and in transport was up by as much as 48.7 percent and 18.8 percent respectively. The baseline here was especially low, however, given that the big lockdowns started in April 2022 with Shanghai.

Industry had a slow start to the year, growing three percent in the first quarter, while manufacturing rose 2.9 percent. Growth in the secondary sector also remained below the expectations of the analysts in April, at 5.6 percent. Production equipment performed well in that month, surging up 13.2 percent which raises hopes for a stronger recovery in the further course of the year. Private sector activity nonetheless remained weak, increasing by only 1.6 percent, while public industrial enterprises recorded a solid growth of 6.6 percent. The decline in profits reveals just how difficult the situation is for industry. In April, profits in industry fell by a whopping 20.6 percent, with the private sector suffering a somewhat greater loss (down 22 percent) than their state-run counterparts (down 17 9 percent).

The two main purchasing managers’ indices were a mixture of light and shade. The Caixin Manufacturing PMI, which primarily represents the activity of small and medium-sized private enterprises, dropped below the expansionary threshold of 50 points in April, down to 49.5 points. In May, it performed an unexpected about-face, rising to 50.9 points. The official PMI of the NBSC tells a different story. This index measures the activity of mainly larger state-run enterprises. At 48,8 points, it reached its lowest level in the last five months in May, after measuring only 49.2 points in April. The official purchasing managers’ index for the service sector dropped from 56.4 points in April to 54.5 points in May, signalising that the catch-up demand for services following the prolonged Covid restrictions is gradually subsiding.

Scope for local governments and banks narrows

Investment in plant and equipment expanded by 5.1percent in thefirst threemonths of the year, before slowing down to 4.7 percent in April. Investment in plant and equipment by private enterprises only increased 0.6 percent in the first quarter, after a minimal rise of 0.4 percent in April. Expenditure on leading technologies remained high nonetheless due to the modernisation plans and drive for autonomy on the part of the Party and the government. The high-tech industry recorded an expansion of investment in plant and equipment of 14.7 percent in April, down a notch from the 16 percent registered in the first quarter.

Infrastructure expenditure rose 8.5 percent in April (Q1: 8 8 percent). The provincial and local governments have very limited scope to increase investments further following high expenditure on pandemic measures over the past three years. Furthermore, the property crisis has caused the sale of land use rights to decline, which represents an important source of income for local governments. The business magazine Caixin quantifies the decrease in income from this source at over 20 percent, with

not much upward movement expected herethis year. Property developers are still struggling with overindebtedness, vacant residential space and dwindling demand outside of the large metropolises.

In 2022, the Chinese property market plunged 28 percent, according to the IMF. Despite the recent easing of the Chinese government, momentum remains weak with knock-on effects for the financial sector. Chinese banks are highly exposed to the buckled real estate sector. Small, local banks are also dependent on the business of small and medium-sized enterprises which suffered especially under the pandemic. There have been some local bank crises already with more likely to follow. At the same time, the financing institutions of the local governments have debts of around 50 percent of gross domestic product. These debts are not included in the official budgets of the local authorities, which means that the precise level of debt here is untransparent. In the last few weeks, some provinces and cities have sounded the warning that they are running out of funds.

The People’s Bank of China (PBOC) does not have much scope to take action on the monetary policy front given the high international interest rates. The renminbi has weakened again since the start of the year. InMay, therenminbi dropped below thepsychologically important threshold of sevenrenminbi to the US dollar. Interest rate cuts would therefore only serve to accelerate the outflow of capital. The PBOC has thus maintained the rates for the one-year and five-year prime loan rate constant at 3.65 and 4.30 percent respectively. Instead of cutting key interest rates, the central bank has opted to reduce minimum reserve ratios. After three cuts last year, the PBOC reduced the average minimum reserve ratio afurther 25basis points to 7.6percent inMarch, releasing an estimatedadditional liquidity of around 500 billion yuan (72.6 billion US dollars). Analysts expect the central bank to contemplate a further reduction in the minimum reserve ratios in the next few months

Exports up, imports down

After five downward months, exports calculated in US dollars shot up by 14.8 percent in March. This was a surprising recovery following the falls of 10.5 percent recorded in January and 1.3 percent in February. Exports then turned down again in April, falling 8.5 percent. Given the weak international momentum and persistent geopolitical tensions, exports are likely to continue to struggle with growth in the months ahead.

A look at where exports have been going reveals a pronounced reorientation towards the ASEAN region, with exports tothis region increasing by 35.4percent inMarch. Exports totheEU only increased by 3.4 percent in the same month, while exports destined for the United States fell by a hefty 7.9 percent. The best performance by far was by car exports, particularly electric ones. In the first quarter, China exported 1.07 million cars (up 58 percent year on year) moving ahead of Japan to become the world’s top car exporter. China’s trade surplus in April amounted to 90.2 billion US dollars in April, after coming in at 88.2 billion in March.

Imports continued their downward path. After starting the year off with a double-digit plunge of 21.4 percent (in US dollars), imports briefly found a foothold and rose 4.2 percent in February before turning down by 1.4 percent in March and 7.9 percent in April. The almost continuous downtrend in imports reflects persistently weak domestic demand. The domestic economy has not yet recovered from the prolonged restrictions under the pandemic.

Disappointing retail sales and willingness to buy

Another indicator of the weak economic momentum in thecountry is the anaemic increase in consumer prices seen recently. In April, the consumer price index only nudged up by the slightest 0.1 percent following a rise of 1.3 percent in the first quarter overall. On the other side, the producer price index dropped by 1,6 percent in thefirst threemonths of the year then accelerated downwards by 3.6 percent in April. In the same month last year, an increase in producer prices of eight percent had fuelled concerns of inflation

Retail sales were mixed. Following a drop of 2.7 percent in the last three months of 2022, sales increased by a solid 5.8 percent in the first quarter of 2023. April saw a double-digit increase in sales of 18.4 percent, although this good performance is due to the low baseline of last year when consumption slumped at the beginning of the big lockdown. Month on month, retail sales were actually down 7.8 percent. There was no trace of the hopefully anticipated ‘revenge spending’ amongst consumers, apart from a certain degree of catch-up consumption in hotels, restaurants and travel. The purchase of consumer durables, above all, remained subdued. Passenger car sales in the first quarter dropped 13.4 percent compared to the same period last year. The increase reported in April of 7.2 percent was also caused by the low baseline.

A major factor fuelling uncertainty and evidently burdening consumers is the situation on the labour market. Not only are many corporations cutting their workforce, particularly in the technology sector and online sector, salaries arealso sinking particularly for those enteringthe workforce. Unemployment is highest in the 16-24 age group. In April, the rate of unemployment within this age group reached 20.4 percent which is the highest it has been since the NBSC introduced an individual indicator for this age group in 2018. The official rate of overall unemployment, on the other hand, dropped 0.1 percentage point down to 5.2 percent.

Europe’s economy recovers gradually

Europe’s economy should recover from the shock of Russia’s war of aggression and the runaway energy prices in the course of this year. Particularly positive news is that the shock has not had a big impact on the labour market and is not likely to have for the next two years at least. The unemployment rate amongst the working population (15-74 years) at just over six percent is historically low, while employment levels are still pointing upwards and have also reached record levels, with a labour force participation rate of 65 percent Labour remains a scarce resource across the EU

In 2022 overall, economic output increased by 3.5 percent year on year. In the fourth quarter of the year, the upward trend stalled with minus 0.1 percent in the EU and stagnation in the euro area. The minorly negative trend continued in the first quarter of the new year with minus 0.1 percent in the euro area and plus 0.1 percent in the EU, buoyed a little by the decreased energy prices, the support measures of governments, thestable labour market and improving sentiment indicators. Growth should accelerate slightly in the next few quarters to produce growth of 0.7 percent for the year overall and a good 1.5 percent next year, particularly in view of the positive carryover of 0.3 percent for the euro area (EU: 0 4 percent) (European Commission 2023). There are nonetheless still downward risks in this forecast, with the robust recovery in services set against the faltering level of activity in industry and construction.

High inflation and monetary tightening will keep a tight lid on growth in both private consumption and investment. The European Commission anticipates a slim growth of 0.5 percent in consumption and 0.5 percent in investment, propped up by stable public investment and investment in plant and equipment. Growth in both consumption and investment should be closer to two percent in 2024. Net exports are expected to contribute 0.5 percentage points to growth in both years. While growth prospects for exports remain subdued, the import of goods is expected to contract markedly, with particularly energy, commodity and food import prices decreasing.

This year, the divergences between theindividual countries will remain relatively substantial, with levels of inflation and growth moving in different directions in the Baltic and Scandinavian countries, on the one hand, and in the countries of southern Europe, on the other, chiefly due to the differing impact of Russia’s war and the energy shock, and the varying intensity of the interest rate shock on the property markets.

France’s recovery firms up

The French economy is set to recover gradually this year and growth by 0.7. Next year, growth is forecast to broaden out and reach 1.4 percent. Investment, consumption and net exports should all lift growth by over 0.5 percent this year. Domestic demand will then join in and add momentum next year. Budget consolidation remains difficult but will make some progress.

Italy on track for growth

The resilience of the Italian economy over the last few months has astounded analysts. Last summer, fears were that industrial production would slump on account of its high dependency on gas. The crisis measures adopted by the Draghi government and steady course in economic policy taken by the new

three-party government have bornefruit. Despite some problems in the implementation of the recovery and resilience plan, it has propped up investment, which grew by three percent. Industrial production and exports are also set to grow considerably, and net exports are also expected to contribute half a percentage point to growth thanks to almost stagnant imports. A contributing factor here was the excess funding for measures to increase the energy efficiency of residential buildings. Consumption expenditure was resilient, buoyed by the spending of a portion of the surplus savings accumulated during Covid and the slightly brighter situation on the labour market. Italy should grow by over one percent both this year and the next. Support measures for energy costs are likely to be reduced substantially and considerable progress achieved in consolidation although deficits will remain high (2023: 4 5 percent of GDP).

Good prospects for Spain and the Netherlands

Spain shot into gear last year andrecorded growth of 5.5percent. Despite being curbed by high energy prices and high inflation in the second half of the year, production increased by half a percent in the first quarter. Consumption expenditure should also grow robustly from spring onwards and investment will be buoyed by Spain’s large-scale recovery and resilience plan. Overall growth for the year is likely to come in at around two percent, which would bring Spain above its pre-pandemic level. The Netherlands is also doing well. Following very healthy growth of 4.5 percent last year, the economy should expand a decent 1.8 percent this year (2024: 1 2 percent), helped considerably by the positive carryover. Upward employment levels, wage increases and public consumption will be propping up consumption expenditure this year. Investment and net exports, on the other hand, are only likely to contribute minimally to growth.

Germany

Germany was in a technical recession over the winter months and is only recovering gradually. Growth in GDP will be hampered especially this year by private consumption, which contracted markedly in the face of high inflation at the start of the year. The situation is only likely to improve in the second half of the year as the upward pressure on prices eases off slightly. The trend in public consumption is similar, with downward momentum coming primarily from the termination of spending on measures to combat the pandemic. The federal government support measures to compensate for the high energy prices are also expected to be much lower than estimated at the start of the year. Investment levels are also weak overall. Investment in plant and equipment and in other assets (patents, licences) should increase due to catch-up demand. The steep drop in investment in construction, which accounts for almost half of gross fixed capital formation, is anticipated to bring investment down slightly overall. Net exports will contribute upwind. We still expect exports to increase by two percent. As imports are stagnating due to falling energy and commodity prices, net exports should contribute 0.9 percentage points to growth. All in all, we expect gross domestic product to stagnant this year compared to last year in real terms (BDI 2023).

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Imprint

Bundesverband der Deutschen Industrie e.V. (BDI) Breite Straße 29 10178 Berlin

T: +49 30 2028-0 www.bdi.eu

German Lobbyregister Number R000534

Authors

Dr. Klaus Günter Deutsch

T: +49 30 2028 1591 k.deutsch@bdi.eu

Stefan Gätzner

BDI-Vertretung, Peking

T: +86 1085 322862 s.gaetzner@bdi.eu

Julia Howald

T.: +49 30 2028 1483

j.howald@bdi.eu

Thomas Hüne

T: +49 30 2028 1592 t.huene@bdi.eu

Antonia Helena Sanllorente Trainee Research, Industrie- und Wirtschaftspolitik

Editorial / Graphics

Marta Gancarek

T: +49 30 2028 1588

m.gancarek@bdi.eu

This report is a translation based on „Globaler Wachstumsausblick, Weltwirtschaft auf der Durststrecke | Schwaches Wachstum, ungleich verteilt“, as of 19 June 2023.