Forecast Hub

Published on: 9 August 2022

Our key macroeconomic and market forecasts and top-line summary views across our main research services, with links to related research.

 

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Key Macro Forecasts

(as of 09 August 2022)
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Key Market Forecasts

(as of 09 August 2022)
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Global Economy

Rising recession risks won’t prevent frontloaded tightening

The global economy is on course for weaker growth, high inflation, and tighter monetary conditions. The world’s largest economies will all suffer for different reasons – policy restraint in China will preclude anything more than a muted recovery from its recent Omicron wave, higher interest rates will weigh on interest-rate-sensitive spending in the US, and the cost-of-living squeeze will take its toll in Europe, where recession risks are highest. Inflation still seems set to fall, albeit from a higher level than envisaged before the war in Ukraine. Indeed, we expect commodity prices to fall, goods price pressures to ease, and base effects to cause big falls in headline rates by the turn of the year. But tight labour markets and strong underlying price pressures will be enough to keep central banks on track to deliver the most aggressive tightening cycle in three decades. This should cause global growth to slow to below trend, rather than trigger a deep downturn. But the risk is that inflation stays higher for much longer, causing policymakers to hike rates well beyond neutral levels.

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Global Markets, FX Markets & Asset Allocation

We expect higher bond yields, a strong dollar and some further drop in equities

We expect further rises in global government bond yields and renewed falls in equity prices over the coming year. Even though yields have fallen a bit lately, we still think they will generally rise by the end of this year. We think the increase in government bond yields, as well as a slowdown in global economic growth, will keep risky assets, such as equities and corporate bonds, under pressure. We also expect the worsening risk environment as well as aggressive tightening by the Fed to result in further US dollar appreciation.

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United States

Economy will bend rather than break under higher rates   

The risks of a recession over the coming months are still low, but the impact of higher energy prices and interest rates means real economic growth will be consistently below its 2% potential pace over the next couple of years. With inflation set to remain elevated over the next few months, we expect the Fed to deliver another 200bp of hikes this year, with another 75bp move in July. We still expect a fall in core inflation and well below-trend growth to prompt the Fed to slow the pace of hikes later this year, and to stop hiking rates altogether in the first quarter of 2023, with the fed funds rate peaking at 3.75-4.00%.

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Canada

Flirting with recession

Very stretched house prices and the elevated level of residential investment make Canada especially vulnerable to the most aggressive global policy tightening cycle in decades. With the Bank set to continue hiking its policy rate to 3.5% by October, from 2.5% currently, we expect GDP growth to slow toward zero over the first half of 2023, as house prices fall by 20%, and there is a real risk of recession.

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Euro-zone

ECB to tighten despite recession 

The euro-zone looks set to fall into recession as high inflation and low confidence knock consumption, uncertainty weighs on investment and weaker foreign demand reduces export growth. Further increases in core and food inflation look set to drive the headline rate close to 9%, and we expect core inflation to remain well above 2% for the next couple of years. We expect the ECB’s rate hiking cycle, which will begin this month, to see the deposit rate rise to +1.25% by the end of this year and +2.0% by mid-2023. The ECB will need to introduce a credible spread-fighting tool to keep bond markets calm as it tightens monetary policy.

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Nordic & Swiss

Nordic policymakers to embrace front-loading of rate hikes

As highly open economies, Switzerland and Sweden are exposed to weak growth in key trading partners in the eurozone, and Sweden and Switzerland are likely to experience recessions later this year. Having started its tightening cycle in April (as we predicted), the Riksbank is likely to front-load its tightening efforts this year and an unscheduled rate hike before the September meeting is now the most likely outcome. Meanwhile,  we expect the Norges Bank to raise rates by 50bp in August and September and to complete the tightening cycle with a 25bp hike in November. Finally, the SNB stole a march on the ECB by raising its policy rate by 50bps in June, but we expect the ECB to pull ahead in the rate-hike stakes before long.

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UK

Recession seems inevitable but won’t prevent interest rates from rising to 3.00%

Even though a UK economic recession now seems inevitable, the rise in CPI inflation to a 40-year high of 9.1% in May and other evidence that domestic price pressures are still strengthening support our view that the Bank of England will raise interest rates from 1.25% now to 3.00% next year. All this suggests that the prices of gilts and UK equities will fall further over the next year.

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Japan

Bank of Japan won’t widen tolerance band any further

While imported inflation will lift underlying inflation close to the Bank’s 2% target by year-end, it won’t stay there, and the Bank of Japan won’t risk tightening prematurely. The Bank had to go to unprecedented lengths to defend its 10-year yield target over recent months. However, long-term interest rates have fallen sharply in recent weeks in both Japan and the US and we don’t expect them to surge again. As such, the Bank won’t be forced to widen the tolerance band around its yield target and the yen will continue to strengthen.

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Australia & New Zealand

RBA will hike more aggressively than most expect

We now expect both the RBA and the RBNZ to lift rates to 3.5% as labour markets remain very tight, consumer spending is resilient and inflation will rise further than most anticipate. However, house prices are now falling in both countries and we think they will ultimately plunge by 20% from their peak in New Zealand and by 15% in Australia. While we aren’t overly worried about the wealth effect as Australia’s household savings rate remained very high throughout the previous housing boom, we think that falling house prices will result in a plunge in residential investment. While the analyst consensus foresees GDP growth around potential next year, we’re forecasting a sharp slowdown in both countries. The upshot is that we expect both central banks to reverse course in 2023.

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China

Zero COVID, zero growth

China’s recovery from the Omicron wave will be far weaker than that in 2020. Outbreak, lockdowns and quarantine remain lingering threats that will make consumers and businesses cautious. The export boom that lifted China’s economy rapidly from its initial lockdown two years ago is going into reverse. Property construction will remain depressed. Meanwhile, although policy support is being stepped up, there is less in the pipeline than fuelled previous recoveries. While many have lowered forecasts recently, we continue to believe that the consensus is too optimistic. We don’t expect the economy to expand at all in 2022 (forecast = zero growth).

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India

More policy tightening than the consensus expects

The surge in global commodity prices will take a little gloss off India’s economic recovery this year but we still expect stronger GDP growth than the consensus. Higher commodity prices will also keep inflation well above the ceiling of the RBI’s 2-6% target range. The RBI has started its hiking cycle and we think rates will rise by more than the consensus is expecting over the next 12-18 months.

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Emerging Asia

Tightening to be gradual  

Most central banks in the region are likely to raise interest rates this year. However, with growth set to slow in the face of higher commodity prices and inflation set to peak soon, tightening cycles are unlikely to be aggressive, and our interest rate forecasts are generally more dovish than most.

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Emerging Europe

Region set for a sharp slowdown

The region’s economies have held up well since the start of the war in Ukraine, but there are now clearer signs that growth is weakening and that headwinds are mounting. Inflation has reached rates last seen in the 1990s, prompting central banks to step up monetary tightening. Current account deficits have blown out due to surging energy imports, which will keep currencies under pressure. And a euro-zone recession will dampen external demand and weigh on exports. Meanwhile, Turkey’s economy will remain vulnerable to sharp and disorderly falls in the lira if global risk sentiment continues to sour.

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Latin America

Commodities boost set to fade

High energy and agricultural prices helped to cushion Latin America from global headwinds over the first half of the year, but the second half is set to be much more challenging. Growth is likely to weaken across the region and our forecasts for 2022-24 are generally lower than the consensus. As growth slows, fiscal concerns are likely to come back to the fore. And in the meantime, although inflation should peak in most countries in the coming months, interest rates are likely to be higher for longer than most expect.

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Sub-Saharan Africa

Debt problems building

Sub-Saharan Africa’s recovery is likely to remain slow going and our growth forecasts are generally below the consensus. While spillovers from the war in Ukraine will boost a handful of economies – notably Angola – in others, the fallout will cause economic pain. Food insecurity and public debt problems will grow. Default risks are highest in Ethiopia and Kenya, although Ghana’s recent turn to the IMF reduces such risks. Meanwhile, South Africa faces a slow-burning debt problem. With an ever-more hawkish global backdrop and the monetary policy tide turning in the region, we think that more and more African central banks will catch the hawkish bug.

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Middle East & North Africa

A Gulf in Growth

If, as we expect, OPEC+ opts to remove oil production quotas beyond September, Saudi Arabia and the UAE stand to benefit most. The combination of rising oil production and looser fiscal policy are both key reasons why we expect the Gulf economies to record strong above-consensus GDP growth this year and next. In contrast, the non-Gulf economies are set for a period of softer growth over 2022-24. At the same time, Egypt’s public finances have been brought back under the spotlight as the weakening of the pound, fiscal slippage, and quick pass-through of rising bond yields, pose a threat to the government debt burden. For now, at least, we think the sovereign should muddle through.

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Commodities Overview

Supply concerns to dominate for some time yet

The war in Ukraine and Western sanctions on Russia have created huge risks to the supply of both energy and agricultural commodities. Russia is a major exporter of both energy and agriculturals and Ukraine is a key exporter of grains and vegetable oil. We think energy prices will stay historically high this year, regardless of the outcome of the war in Ukraine, given that the West will persist with efforts to reduce its dependence on Russian energy. This process will disrupt existing supply chains and prove costly. That said, we expect the price of oil to start to ease back as we move into 2023 as supply responds to higher prices and demand growth slows.  Most other commodity prices will also be supported in the near term by higher energy costs as they raise the cost of production. But we forecast that industrial metals prices will fall this year on the back of weaker Chinese demand. The price of gold also looks set to fall as inflation rates ease back and the historic inverse relationship with US real yields is restored. It will be a similar story with the prices of agricultural commodities, which should come off the boil as supply chains adjust and production rebounds, incentivised by earlier high prices.

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Energy

Russia-related uncertainty keeping energy prices high

We expect oil prices to remain high as uncertainty lingers over the extent to which Russian crude oil exports will decline over the coming months. Our view is that they will fall from about 5m bpd at present to around 3.5 to 4.0m bpd by the end of the year, as we expect imports from Western countries to fall faster than an increase in imports from elsewhere. We think that they will remain low next year, when the EU’s ban on insuring and financing vessels carrying Russian oil comes into effect. It’s also rumoured that the G7 will get on board with the EU’s ban, which could lead to another steep decline. In the coal and gas markets, the story follows a similar theme: fewer Russian exports due to the West’s phasing out of Russian supply will keep prices high. In the gas markets in particular, Russia is also unilaterally cutting exports to Europe, further supporting prices.

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Metals

Softer demand will weigh on prices this year

Metals prices have fallen back in the last month or so on concerns about China’s demand. Even without the slump in economic activity associated with the country’s zero-COVID policy, China’s economy has been slowing. We think any stimulus will only put a floor under demand. We also expect weaker economic growth in other key metal-consuming regions such as the US and Europe, which supports our view that metal demand growth will be subdued this year. Supply is expected to remain constrained because of historically high energy prices, but we expect production in China to rise this year. Taking this all together, we expect metal prices to fall from current levels by the end of the year but to remain historically high.

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UK Commercial Property

Ukraine war bolsters case for market slowdown in 2022

The recovery in the UK commercial property market is set to slow this year. With bond yields higher than expected and set to rise even further, we now expect all-property yields to move sideways in 2022 and rise from 2023, which will reduce capital value growth and returns. Structural change will continue to weigh on retail and office performance, while an increase in supply is expected to cool industrial rental growth. Industrial and retail warehouses are expected to lead the way on total returns over the next five years

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European Commercial Property

Property yields to reach their trough in 2022

A weaker economic outlook and larger increases in interest rates and bond yields this year and next mean that we expect property yields to reach their trough this year. While industrial yields look most stretched compared to alternative assets, we think office yields are likely to be most vulnerable given the sector’s weaker rental prospects. Rising property yields will hit capital values and returns, particularly over the next couple of years

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US Commercial Property

All-property returns set to fall to zero in 2023

The largest quarterly deterioration in property valuations on record in Q1 has driven a downward revision in our forecasts for the next few years, with property yield rises now likely to occur sooner than before. While we are not forecasting an Armageddon scenario, we now expect all-property returns this year to slow to around 8.5%, before dropping to zero in 2023. There will still be relative winners, where rental growth is strongest and investor demand is growing, but we now expect the next few years to be relatively poor ones for US real estate.

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UK Housing

House prices headed for a fall

If we are right to forecast that the Bank of England will have to raise interest rates to 3.00% to stamp out inflation then we are on the cusp of the fastest increase in mortgage rates since the late 1980s. That caused house prices to fall by 20%. But the tight labour market, lower loan-to-value ratios, and a lower peak in interest rates means the drop in prices should be less dramatic this time. We expect house prices to fall by 5% over the next two years, reversing a fifth of the increase since the pandemic began.

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US Housing

Rising mortgage rates will cool housing market activity and house price growth    

Mortgage rates are rising and will reach 6.5% by mid-2023. As a result, mortgage payments as a share of income will exceed the peak seen in the mid-2000s. That will cut home sales, with existing sales ending 2022 more than 20% down from their end-2021 level. House prices will also decline as affordability constraints bite, but tight markets and a lack of forced sellers means we expect the drop to be relatively modest, with annual growth falling to -5% by mid-23. The lack of homes for sale has supported rental demand and led to a rapid recovery in rental growth, but affordability constraints mean demand for rental properties will slow, prompting rent growth to cool.

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