News in Charts: The global economy’s resilience

Interest rate hikes, sharp increases in the cost of living and energy price shocks have dominated economic news headlines this past year, yet the global economy is proving to be surprisingly resilient. Most major economies have avoided a recession, so far, with only a few countries and regions, such as Germany and the euro area, experiencing a technical recession.

Economic activity remains fairly strong as household spending continued to grow despite the sharp fall in real wages globally, supported by fiscal transfers, excess savings accumulated during the pandemic and net migration.

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Investment has also been surprisingly resilient to the sharp increases in interest rates. Similar to household consumption’s cushion of excess pandemic savings, investment has been resistant to higher rates since corporates brought forward borrowing intentions in 2020 and 2021, as highlighted by a large spike in corporate bond issuance. The current issuance levels are likely weaker than the trend, though not by much, and the UK in Q1 2023 posted its strongest quarter of corporate issuance since the pandemic. Once again suggesting that the economy remains resilient and it is still going through a process of unwinding some of the pandemic dynamics.

Another sector that has held up surprisingly well has been the real estate sector – following the aggressive hiking cycle enacted by the Fed, anticipation has been for US house prices to fall sharply. Although the annual growth rate dipped in both March and April, the monthly growth rate has been positive for most of 2023.  This more resilient outcome is a culmination of supply adjusting to the fall in demand, with construction expenditure dropping from the end of 2022, dampening the impact on prices.

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Low levels of new mortgage activity suggests that demand for housing remains weak, as mortgage rates remain high.

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Outside of the US, we remain more concerned about growth prospects in Europe and the UK. However, even in these two areas economic sentiment notably rebounded in late 2022 and 2023. Even though the euro area did enter a technical recession at the end of 2022, better economic sentiment was one of the signposts that we were on the lookout for as a signal that consumers had put the winter energy price shock behind them, another tick-mark in favour of a resilient economy.

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In Fathom’s recent Global Outlook Summer 2023 we stated that, although the global economy has been more resilient than expected, the dangers of a downturn have not passed. As we have argued for a while now, higher interest rates have a habit of breaking things, and this time is unlikely to be different. Yet, each economic and hiking cycle comes with its own characteristics. This one appears to be increasingly defined by a much greater uncertainty over how quickly and by how much the economy will respond to the higher rates already implemented. We remain most concerned about the UK economy, as the immediate risk of a global recession subsides. However, over the course of the coming 18 months a recession might be hard to avoid in many major economies, as higher rates have set the wheels in motion. The continued resilience of the global economy suggests that, when a recession does emerge, it may materialise from unexpected angles.

The views expressed in this article are the views of the author, not necessarily those of Refinitiv Lipper or LSEG.