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Higher For Longer

April 20, 2023

Tightening credit conditions will weigh on growth, especially in Europe.

Financial volatility continues to moderate amid settling in the banking sector.  Economic data in much of the world has remained positive.  But a slowdown is in store.  Businesses and households will have a harder time borrowing as credit conditions tighten further.  Financial risks have risen.  Despite the most aggressive tightening cycle in decades, inflation remains too high for comfort.  In sum: interest rates are set to stay higher for longer, while growth will be lower for longer.   

Last year’s instability in the U.K.’s gilt market and the recent banking sector turmoil in the U.S. remind us of the substantial vulnerabilities that exist among banks and non-bank financial intermediaries.  A stalemate in the Ukraine war continues to threaten the reliability of food and energy supply chains.  The downturn of U.S.-China relations will remain another source of uncertainty. 

Here are our up-to-date perspectives on how major economies are poised to perform during this year and next.

United States

  • Inflation is moderating but remains elevated.  The headline consumer price index decelerated to 5.0% year over year in March, driven by lower prices of utilities and food at home.  Core inflation was less encouraging, ticking up one-tenth to 5.6%.  The price correction in durable goods has run its course, while services inflation persists.  The surge in shelter costs has started to slow and should support disinflation in the months to come.  Wage growth has fallen from a peak but is higher than past norms.
  • With inflation still elevated and labor markets showing little slack, we expect the Fed to issue another 25 basis point rate hike at its May 3 meeting.  However, credit conditions have tightened following Silicon Valley Bank’s failure, which will weigh on the economy and reduce the need for further tightening. 


  • Recent data shows improving momentum in the eurozone, supporting our call that a recession will be avoided.  Industrial production and orders for February were positive as supply shocks diminished.  The Purchasing Managers’ Index indicated resilient activity heading into the second quarter.  That said, growth will remain lackluster as the effects of monetary and fiscal tightening become more visible later in the year.  Banking stress in Europe has receded significantly over the past month.
  • Eurozone inflation decelerated notably to 6.9% year over year in March, from 8.5% in February.  The decline was mainly driven by the lower cost of energy, as core inflation rose to new record highs.  Amid improving activity and a lack of significant positive developments on the inflation front, the European Central Bank is set to tighten through this summer and remain on hold until the middle of next year.  

United Kingdom

  • Favorable revisions and resilience in recent data have boosted near-term growth prospects and hope that a technical recession might be avoided.  The U.K. economy likely stagnated in the first quarter.  However, ongoing strikes and the extra bank holiday for the King's coronation are expected to lead to a decline in output in the second quarter.  Growth will remain weak through the rest of 2023 as the boost to incomes from lower energy costs will be more than offset by higher mortgage rates and weak or negative real wage growth.
  • After signaling that the rate hiking cycle was close to an end at the February meeting, the minutes of the March Bank of England meeting suggested a renewed focus on labor market tightness.  Lack of progress on core inflation, improving activity, healthy jobs growth and an upside surprise in wage growth support our call of another hike in May. 


  • February economic data showed a continuing recovery in consumption, with nominal retail sales rising for the third straight month.  Auto sales and the Bank of Japan’s Consumption Activity Index accelerated in February.  We expect the consumption recovery to continue, supported by pent-up demand and inbound tourism.  However, the weak external environment will continue to drag overall growth down.  A boost to exports from higher demand from China will likely be offset by weaker exports to the West.
  • Inflation has been hovering well above the 2% target since March 2022, fueling speculation that the Bank of Japan (BoJ) will be forced to reverse its course under new leadership.  With inflation unlikely to sustain above 2% for reasons listed here, only modest policy changes are in the offing.  The BoJ will likely tweak its yield curve control program by shortening its target maturity.  Widening interest rates differentials could lead to renewed pressure on the yen.


  • With the economy no longer weighed down by COVID restrictions, activity has surprised to the upside.  Restaurants are full, and traffic is back.  The property market appears to have bottomed out.  Exports exceeded expectations in March.  But the near-term momentum is unlikely to sustain.  External demand is set to weaken, and the outlook for private investment is uncertain.  Weak wage growth and employment will continue to hold the economy back.  The phrasing of the growth target of “around 5%” is a tacit acknowledgement that high growth was no longer possible nor desirable. 
  • The reopening boost hasn’t led to reflation in China.  In fact, inflation has been trending downwards after the reopening.  Economic slack, labor market weakness, receding supply pressures and price controls (particularly on oil) are keeping inflation in check.


Meet Our Team

Carl R. Tannenbaum

Carl R. Tannenbaum

Executive Vice President and Chief Economist
Ryan James Boyle

Ryan James Boyle

Chief U.S. Economist
Vaibhav Tandon

Vaibhav Tandon

Chief International Economist


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