The Northern Trust Economics team shares its outlook for major markets in the months ahead.
Despite strong headwinds, the global economy has continued to expand. But an economic divergence has developed. The U.S. and Japan have exhibited unexpected strength; China, which was anticipated to drive global growth this year, is struggling. And Europe is somewhere between these extremes.
With inflation trending down, real incomes are set to turn positive in most economies, which will boost purchasing power. However, loosening labor market conditions could constrain the capacity to splurge. In some countries, the bite of higher interest rates is taking a noticeable toll. The “higher for longer” interest rate environment will result in a sustained period of below-trend growth.
Here are our up-to-date perspectives on how major economies are poised to perform during this year and next.
Japan
- The Japanese economy grew at an annualized rate of 6% in the second quarter, marking the strongest growth since the last quarter of 2020. A surge in net exports was the main driver, as imports fell due to fading pent-up domestic demand. But recent gains in exports are unlikely to be sustained, given the slowing global economy.
- The Bank of Japan (BoJ), at its July meeting, surprised markets by raising the 0.5% cap on its yield curve control (YCC) policy to 1.0%. The move was aimed at enhancing the sustainability of the policy, rather than tightening it. Given recent developments in wage and consumer price inflation, we believe further policy revisions are in store. The termination of YCC later this year and a pivot to monetary tightening in the second half of 2024 is our base case.
China
- As we wrote here, bad news is piling up for China’s economy. The economic decoupling of China from the West is starting to gather pace. Foreign investments are drying up. Consumption is not taking off amid lingering property sector woes, tipping consumer prices into deflationary territory last month. And a major Chinese trust firm missed payments on investment products, adding to concerns that the economic slowdown may trigger a liquidity crisis beyond the real estate sector.
- These developments have prompted Beijing to deploy more policy support. However, the measures will neither solve all of their problems nor revive the property sector. Nevertheless, more policy support will be delivered, but the scope for a massive stimulus or devaluation of the currency to boost exports is narrow.
Information is not intended to be and should not be construed as an offer, solicitation, or recommendation with respect to any transaction and should not be treated as legal advice, investment advice, or tax advice. Under no circumstances should you rely upon this information as a substitute for obtaining specific legal or tax advice from your own professional legal or tax advisors. Information is subject to change based on market or other conditions and is not intended to influence your investment decisions.
© 2023 Northern Trust Corporation. Head Office: 50 South La Salle Street, Chicago, Illinois 60603 U.S.A. Incorporated with limited liability in the U.S. Products and services provided by subsidiaries of Northern Trust Corporation may vary in different markets and are offered in accordance with local regulations. For legal and regulatory information about individual market offices, visit northerntrust.com/terms-and-conditions.
A message from Advisor Perspectives and VettaFi: To learn more about this and other topics, check out our podcasts.
© Northern Trust
Read more commentaries by Northern Trust