THE global economy is expected to see its growth momentum slow in the fourth quarter of 2023 and beyond, said BNP Paribas in its latest global outlook report.

The 69-page report noted that the numerous rounds of monetary tightening were gradually dampening demand, while some of the buffers that supported market activity – such as the excess savings accumulated during the Covid-19 pandemic and fiscal stimulus – are fading.

“We see the US sliding into recession, stagnation in the eurozone, a shallow recovery in China, and tepid growth in emerging markets,” said the report.

Growth struggles

A recession in the US will be “mild by historical standards”, said the report, with a fall in gross domestic product of around half a percentage point from peak to trough in the first half of 2024.

Over the same period, the bank expects the eurozone economy to stagnate due to weaker activity in the services sector and an already weak outlook for manufacturing.

Economists think that the weakness in the European market has been overstated. “The recent improvement in consumer confidence, likely stemming from the energy-related gains in terms of trade, is encouraging and, by supporting consumption, should prevent a recession,” the report said.

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As for China, the report said the recent stimulus package should lift growth in the fourth quarter of 2023, but the recovery “looks set to remain shallow” and leave growth overall weaker next year, as several cyclical and structural forces continue to weigh on the economy.

Among the advanced economies, BNP Paribas said Japan is an “exception” as the post-pandemic rebound takes place alongside a stimulative fiscal stance. The weaker yen will also shield exports from the ongoing global slowdown, the report said.

U-shaped recovery in China

In China, the bank noted that the easing of monetary policy in the world’s second-largest economy has not prevented the credit impulse from weakening in the last few quarters.

“The policy response has to be more stimulative,” said Siddharth Mathur, BNP Paribas’ head of macro strategy and emerging markets research (Asia-Pacific), at a media roundtable on Tuesday (Sep 12).

This response can be on the monetary side, such as cutting reserve requirement rates. On the fiscal side, this could include “administrative measures” on China’s property sector.

Overall, BNP Paribas expects China to see a slower U-shaped recovery instead of a sharper V-shaped one, with weaker growth in 2024 compared to this year.

On foreign exchange, Mathur said the source of the yuan’s weakness was the low interest rates in sluggish market activities in China. The marginal rate of return on capital investment in China is lower compared to other economies, he said, adding that this was a feature that’s common in the rest of Asia.

The 2 per cent inflation target 

In its report, BNP Paribas said it expects inflationary pressures for goods in the US and the eurozone to continue slowing at pace for the rest of 2023 and beyond.

On the supply side, goods manufacturers now enjoy lower input prices than a year ago as supply chains recovered from disruptions due to the pandemic. At the same time, the weaker market demand means that manufacturers are unable to raise prices for goods, the report said.

“We think demand might become a more important factor. While initially the normalisation of supplier delivery times was heavily led by supply-side factors, weaker demand has recently become the leading cause of the sustained easing,” it said.

The bank noted that inflation in the housing sector has also gone down due to the sector’s sensitivity to interest rates.

Non-housing services inflation, however, has barely budged in the US and is still creeping higher in the eurozone and the UK, with a gradual slowdown happening only in 2024.

“As long as services inflation is near current levels, it will be hard for core inflation to return sustainably or swiftly to levels consistent with central banks’ 2 per cent targets,” the report said.

Asked about the relevance of this 2 per cent target given that inflation is likely to remain high for a long time, economists at the roundtable said that these targets are closely linked to the credibility of the central banks.

“The important thing is that the inflation is anchored. The time the central banks take to get there is less of a problem,” said Luigi Speranza, BNP Paribas’ chief economist and global head of its strategy research unit.

‘Longer’ is the new ‘higher’

As economies reach the end of monetary-tightening cycles, many are no longer asking when interest rates will peak, but rather how long these high rates will last.

“Despite (the) weak growth outlook, the mix of stickier inflation and a higher neutral rate of interest justifies (the) ‘high for longer’ policy in the US and Europe,” the report said.

It added that “high for longer” does not apply only to the duration of the likely policy-rate pause – around 12 months for both the US Federal Reserve and the European Central Bank (ECB), based on BNP Paribas’ forecasts – but also to the slope of policy-rate cuts.

BNP Paribas envisages a relatively shallow cutting cycle from both the Fed and the ECB starting in the middle of 2024.