Q3 Macro and Market Outlooks

Published on: 10 August 2022

Your one-stop-shop for the most recent quarterly Outlook reports from across our macro and market services. These in-depth guides offer our latest views and updated forecasts. CE Interactive’s Country Dashboards provide direct access to the data underlying these reports.

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Global Economics

Recession threat broadens

The outlook for the world economy has darkened again and we have reduced our forecasts for all major economies, leaving them further below the consensus of economists. We now anticipate recessions in the euro-zone and the UK and expect the US, Canada and Australia to avoid economic contraction only narrowly. If a technical “global recession” is avoided, this will be largely thanks to a moderate post-COVID rebound in China and relative economic strength among the major commodities producers. Inflation is likely to prove more persistent than in the recent past, so the widespread and aggressive monetary policy tightening cycle has further to run. But this will add to headwinds to growth and ultimately force several central banks to reverse course in 2024 or even before.

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Global Markets

We think the latest asset price rallies will prove short-lived

We doubt the recent rallies in global bond and equity markets will be sustained over the remainder of the year. While we no longer think the 10-year US Treasury yield will exceed its June peak, we still expect it to rise as the Fed delivers a bit more tightening than investors now seem to anticipate. And we think government bond yields elsewhere will increase for similar reasons. We expect that, combined with a deteriorating economic backdrop, to place renewed pressure on “risky” assets; we forecast major benchmark equity indices – in both developed and emerging markets – to fall further this year, and expect corporate bond spreads to widen. But next year we think both “safe” and risky assets will fare a bit better, as central banks transition to easing mode and the economic backdrop starts to improve.

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Asset Allocation

We think the worst is yet to come for most risky assets

Although we think that we have now passed this cycle’s peak in long-dated US Treasury yields, we still suspect that investors are underestimating just how far the Federal Reserve will raise interest rates, and how long it will be before inflationary pressures ease sufficiently for interest rate cuts to come onto the agenda. With that in mind, we think that the yields of most “safe” assets will end this year above their current levels. Meanwhile, given our relatively downbeat view of the global economy, we also expect most “risky” assets to see renewed declines, as risk premia climb and disappointing growth in corporate earnings undermines global equities. We think, though, that the outlook for most safe and risky assets is brighter in 2023 and 2024.

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FX Markets

We think the dollar rally still has further to run

We think the dollar will appreciate further through at least the end of the year as the global economy continues to falter and “safe-haven” demand remains strong. Although we see limited scope for a further widening of expected interest rate differentials in favour of the greenback, we expect an environment in which the Fed and other major central banks continue to tighten monetary policy, even as economic growth slows, to support further dollar strength. We expect risky assets to remain under pressure for some time yet, and we believe that long-term yields have already peaked for this cycle. And previous peaks in the 10-year US Treasury yields have, more often than not, coincided with further dollar appreciation. We think a similar story will play out this time around as safe-haven demand makes the dollar, alongside the yen and the Swiss franc, the best performing currencies over the rest of this year and, probably, some way into 2023.

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Economy to avoid recession narrowly

We expect the economy to avoid a recession only narrowly, as higher interest rates trigger a contraction in residential investment and weakness in consumption growth. Core inflation has been stronger than we expected this year but, on balance, we are more confident that it will eventually return to the 2% target, allowing the Fed to reduce nominal interest rates in late-2023 and 2024.

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Increased risk of recession

The Bank’s aggressive policy tightening will weigh heavily on domestic demand, with consumption growth set to slow sharply while residential investment plunges back to pre-pandemic levels. There is scope for the economy to avoid recession if exports rebound as we expect, but it will be close, with GDP barely growing at all over the first half of 2023. Growth should pick up again in 2024, however, after the sharp fall in inflation that we forecast allows the Bank to loosen policy again.

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Recession won’t stop aggressive ECB tightening

The euro-zone looks on course to fall into a mild recession in the coming quarters. Real incomes are falling, business sentiment has plummeted and growth in the region’s export markets is slowing. Nevertheless, the labour market is likely to remain tight and wage growth should accelerate, causing inflation to remain above target over the coming years. As a result, we expect the ECB to press ahead with an aggressive tightening cycle over the next 12 months, pushing interest rates above their neutral levels temporarily. The Bank will also implement a new spread-fighting tool, and we think there’s a good chance that it will have to restart its net asset purchases at some point in the coming year or so.

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Nordic & Swiss

Rate hikes and recessions loom large

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Soaring inflation to trigger a recession

A rise in CPI inflation from the 40-year high of 9.1% in May to a peak of 12% or higher in October will reduce real incomes by enough to mean that a recession now seems inevitable. Our forecast that real household disposable income will fall by more than 2% in both 2022 and 2023 would be the biggest decline on record and will surely prompt real consumer spending to fall. With the global factors that initially boosted inflation now being replaced by more persistent domestic inflationary forces, a recession is unlikely to reduce inflation to the 2% target on its own. As such, we think interest rates will be raised in a recession for the first time since 1975. Our forecast that the Bank of England will increase rates from 1.25% now to 3.00% next year envisages rates peaking much higher than the consensus forecast.

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BoJ will reduce pressure on Yield Curve Control

Supply shortages and continued virus caution will result in a weaker recovery in Japan than most anticipate. With wage growth sluggish too, the Bank of Japan won’t see a need to lift its policy rates. However, we expect the Bank to widen the tolerance band around its 10-year yield target as its swelling holdings risk stifling the functioning of the bond market.

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Australia & New Zealand

Housing downturn raises recession risks

With inflation rising even further than we had anticipated, both the RBNZ and the RBA will slam harder on the brakes than most anticipate. We expect policy rates to peak around 3.5% in both countries. With the ongoing housing downturns set to intensify, consumption growth will soften and dwellings investment will plunge. Accordingly, we expect both central banks to start loosening policy next year and have pencilled 50bp of rate cuts by the RBA and 75bp of rate cuts by the RBNZ.

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Reopening rebound set to slow

Activity has bounced back from lockdowns but China’s economic recovery will become more challenging from here on as exports turn from tailwind to headwind and the property downturn deepens. Policy restraint means that stimulus will not fully offset these drags.

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More frontloading to come

Strong economic growth and surging inflation have prompted the RBI to kick-start its hiking cycle and we think the central bank will continue to frontload policy tightening. In all, we think the repo rate will rise by a bit more than the consensus expects over the next six to nine months. We also expect policymakers to step up financial repression so that policy tightening doesn’t significantly worsen the public debt dynamics.

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Emerging Asia

Tightening cycles to be short lived as headwinds grow

Further interest rate hikes are likely across the region in the near term, and we have raised some of our year-end forecasts to reflect growing concern among the region’s policymakers about inflation. However, with economic growth likely to slow over the coming months and inflation set to fall back sharply by the end of the year, tightening cycles are likely to be short lived. We think most central banks will be finished hiking rates by early 2023. In contrast, the consensus and financial markets are expecting tightening cycles to continue well into next year.

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Emerging Europe

Sharp slowdown in store as storm clouds gather

Economies in Emerging Europe were resilient in the first half of this year, but the outlook has deteriorated markedly as headwinds have strengthened. Inflation is likely to continue rising and we think that GDP will do little more than stagnate in the coming quarters in most countries, with Czechia, Slovakia and Bulgaria entering recession. Our growth forecasts are generally below the consensus and we think the risks are firmly skewed to the downside. Interest rates are nearing a peak in Poland and Czechia, but we think that a lot more tightening lies in store in Hungary and Romania and, in all cases, that policy rates will remain high for longer than most expect through next year.

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Latin America

Commodities boost unwinding

High energy and agricultural prices helped to cushion Latin American economies over the first half of the year, but the second half will be much more challenging. 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 kept high for longer than most expect.

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Sub-Saharan Africa

Debt problems come to the fore

Sub-Saharan African economies are suffering heavily from the spillovers from Fed tightening and the war in Ukraine. Policy in the region is likely to tighten further as a result, weighing on growth. Indeed, our growth forecasts for this year and next are generally lower than the consensus. And balance sheet risks are building. Sovereign default risks are particularly high in Ghana, Kenya and Ethiopia.

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Middle East & North Africa

Oil fuelling a gulf in growth

The spillovers from the war in Ukraine are driving a divergence in the region’s outlook. Higher oil output and looser policy will drive above-consensus GDP growth in the Gulf this year and next. Elsewhere, though, external and debt problems will hold back growth.

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Prices to find a floor

While non-energy commodities prices may fall a little further, we think the big move down in those prices is now behind us. Admittedly, the demand outlook has undeniably deteriorated in recent months, but many of the supply risks that prompted prices to soar earlier in the year are still with us. Moreover, our forecast of persistently high energy prices means that the cost of production of most other commodities will remain elevated for much of this year and into 2023.

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US Commercial Property

All-property returns to fall to zero next year as values slide

The dramatic shift in the interest rate environment over the first half of the year means that we have brought forward (and increased) our forecasts for yield rises. Property valuations now look as bad as they did in 2007, and with the 10-Year Treasury yield moving toward 4% by year-end, something has to give. We now expect property yields to climb by a cumulative 40-50 bps over the next few years.

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USCP: Office Metros

Office Metro Outlook

In light of the deterioration in the economic environment, our office metro forecasts have been downgraded across the board. Those downgrades are driven by a substantial shift in our yield view, which mean that capital values in all 17 metros are forecast to fall in the 2022-24 period, before showing signs of recovery in 2025.

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