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Finishing Touches

May 25, 2023

Risks to growth are ample but may prove surmountable.

Authors and artists face a challenge with every work: Knowing when their piece is finished.  A self-critical creator can always find a thought to tweak or a color to change, but at some point, the pens and paintbrushes must be set down.

Central banks are working through that dilemma now.  After a hard, year-long battle against inflation, the end of rate hiking cycles is in sight.  While the rapid ascent is over, some nations are struggling to ensure they have passed the climax of their inflationary story.  More rate hikes may yet be in store, but without the size, frequency and urgency of decisions made in 2022.

Challenges extend beyond inflation.  Nations must reckon with slower domestic demand, higher borrowing costs, constrained labor supply, trade decoupling, an ongoing war and banking sector uncertainty.  We are living in a story with a long and complicated plot.

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

United States

  • U.S. inflation is just barely improving.  Core consumer price inflation measured 5.5% year over year in April, still too high.  Taming house prices and a long-awaited cooling of services inflation offered hope for further improvement.  Labor markets remain strong, with the unemployment rate at 3.4%.  Job openings are declining, and initial unemployment claims have increased slightly.  With prices calming and labor markets rebalancing, we expect the Federal Open Market Committee’s increase in May was the last policy hike, but cuts are not yet in sight.
  • The debt ceiling debate has introduced legitimate fears of a financial crisis, contributing to a pervasive sense of worry.  Financial sector instability and the end of pandemic supports are putting U.S. consumers through a difficult transition back to normalcy.  Consumer spending has been the defining element of the sustained U.S. recovery; if employment holds up, so can spending.


  • Eurozone inflation is proving persistent and broad-based.  From a peak of over 10% year over year in the fourth quarter of 2022, HICP inflation fell to 7.0% in April.  The progress has been driven by falling energy prices; core inflation (excluding food and energy) has marched upward, most recently to 5.7%.  Surveyed inflation expectations are climbing; food inflation may have peaked but remains stubbornly high at 15.2%.
  • Despite the high cost of living, the euro area economy continues to perform.  Unemployment reached a record low of 6.5% in April.  We anticipate two additional rate hikes as the European Central Bank works to contain inflation, then a pause to observe how the economy performs in the wake of rapidly tightened monetary policy.

United Kingdom

  • In the pandemic, we debated the shape of the recovery, using letter to illustrate, like a rapid V, a lethargic U, or a permanently impaired L.  No letter matches the path of the U.K. economy: steady growth through 2019, a sharp contraction and recovery, and then flat real growth for over a year.  The economy returned near 2019’s level of output, and stayed there.  Prospects hereafter will be constrained by a limited labor pool and the lingering trade isolation of Brexit.
  • The U.K. shows the least evidence of peak inflation, with prices still surging across nearly all categories. A gradually strengthening pound will offer only a limited reprieve to still-elevated import costs.  Wage gains of nearly 6% for two years have not been sufficient for many households to weather the surge.  The Bank of England (BoE) had signaled the end of its hiking cycle as of March; further inflation thereafter forced another hike in May.  We anticipate one more hike to conclude the tightening cycle, with cuts to follow when inflation pulls back, likely not until the middle of next year.


  • Trends in Japan are following a similar path to those in the rest of the developed world, but on a more subtle scale: higher inflation, better wage gains for workers, and recovering growth.  Pent-up demand and more reliable supply chains will support the Japanese economy, but dampened external demand will keep a ceiling on the recovery (despite the weakened yen).  On balance, growth through 2024 will likely not exceed 1% annually; slow, but in line with the nation’s average since 1990.
  • The Bank of Japan (BoJ) has been the lone holdout in maintaining a negative interest rate regime.  Amid high employment, elevated inflation, and 10-year interest rates pushing the bounds of the yield curve control regime, the BoJ is poised to begin normalizing policy in the year ahead.  We expect a muted move relative to the swings executed by other central banks.


  • As we recently highlighted, China’s pandemic recovery is in full bloom after a prolonged interval of restrictions.  The surge in activity cannot sustain indefinitely: the export-led economy is facing lower external demand and renewed trade pressures.  Domestic spending on services is accelerating, but manufacturing and business investment are sluggish.  The nation is moving into a new era of slower but more sustainable growth; we take the official target of about 5% growth as an upper bound. 
  • Benign inflation is a rare point of simplicity for Chinese policymakers.  With employment strong and prices well controlled, monetary policy can get by with only minor tweaks.  Balancing fiscal, industrial and domestic policies will be their greater challenge.

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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