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Global Economic Research

Global Economic Outlook: On Thin Ice

The Northern Trust Economics team shares its outlook for key markets in the month ahead.

The economic outlook for major world economies has darkened since our last update in June.  Inflation is proving to be stronger than expected, broadening beyond the headline energy and food components.  Growth concerns have taken a back seat for central banks, leading to a pace of monetary policy tightening not seen in decades.  As a result, we have revised our forecasts to include higher inflation and weaker growth. 

Adjusting for inflation, the U.S. economy contracted for two consecutive quarters, but we believe the robust labor market will keep the economy out of an official recession. However, Europe will struggle to cope with complications of global supply shocks, the Ukraine war and Brexit.  The use of energy as a wedge by Russia is likely to push the eurozone into a short, shallow recession. 

Here are perspectives on how major economies are poised to perform this year and next.

United States

  • Technical factors are keeping U.S. gross domestic product (GDP) in contraction, led by a wide trade deficit in the first quarter and slower inventory accumulation in the second. Consumption has dampened but should continue to underpin growth, backed by a strong labor market.  We have revised our growth forecast for the year ahead downward, but expect the economy to avoid a recession.
  • Inflation remains a major source of concern for the Federal Reserve. The recent correction in global commodities is a welcome development, but the trend in underlying inflation is not encouraging.  Core prices have been rising over the past four months.  Our outlook for inflation has been revised higher, as some of today’s inflation drivers are likely to linger.  As a result, we expect the Fed to continue hiking interest rates aggressively, taking the overnight rate to a peak of 3.75-4.00% at the end of the year.


  • The bloc faces high uncertainty from restrictions of natural gas supplies by Moscow. This will disrupt European supply chains and exert upward pressure on inflation, leaving a bigger hole in consumers’ wallets.  Industrial activity will suffer in major economies like Germany and Italy.  We expect the eurozone economy to witness a technical recession starting in the fourth quarter of 2022. 
  • The half-point rate hike by the European Central Bank (ECB) at its July meeting ended an era of negative interest rates. The Transmission Protection Instrument was announced to limit fragmentation risk on sovereign bond yields.  The ECB’s data-dependent approach, retiring forward guidance, suggests that more front-loaded hikes are in order.  We expect additional hikes this year to bring the deposit rate to 1%, followed by a long pause as growth suffers from tighter financial conditions and falling real incomes.

United Kingdom

  • Second quarter activity in the U.K. was not as weak as initially feared. Monthly GDP was higher than expected in May, with previous months revised upwards.  However, British consumers and businesses continue to face high costs from global and Brexit-induced factors.  The retail sector and likely the overall economy contracted in the second quarter.  High inflation is weighing on activity, and the drag is set to intensify as the retail electricity/gas price cap is set to rise by 40% in October.  We expect GDP growth to turn negative again in the fourth quarter this year.    
  • The Bank of England was the first major central bank to begin hiking rates in this cycle and will be the last major one to stop. The activity data doesn’t support a case for a faster pace of policy tightening, but the inflation dynamics and recent hawkish statements from Governor Bailey suggest more hikes are in store.  A half-point increase looks likely in August, followed by 25 basis point increases at every meeting, leading to a terminal rate of 3.0% in early 2023.


  • We have revised down our growth outlook for Japan, reflecting the broader slowdown in the global economy. A weaker currency will be a plus for Japanese exports, but deteriorating growth prospects abroad mean that the gains will be limited.  Resurgent COVID cases will also lead to a more moderate recovery in consumption.  On the policy front, a departure from Abenomics looks unlikely in the near-term. 
  • The Bank of Japan (BoJ) is the last dove standing, as it left all the parameters of its monetary policy unchanged at its July meeting, including its yield curve control program, despite a notably weaker yen. In our view, the BoJ will continue to maintain the current policy stance until it sees clearer prospects of inflation sustaining around 2% and evidence of wage growth.  These conditions are unlikely to be met over our forecast horizon.


  • China's GDP grew just 0.4% in the second quarter over the same period the previous year, as lockdowns dented activity at the start of the quarter. In our view, China's economy is on track to recover in the second half of the year, led by policy support and easing restrictions.  Infrastructure investment will be the main driver of growth as the threat of renewed lockdowns will continue to hold consumers back. 
  • China’s real estate industry remains the biggest concern for Chinese policymakers. Defaults in the property sector have been rising over the past year.  An increasing number of homebuyers have stopped mortgage payments.  This has not only dampened prospects of a housing market recovery, but also adds to the vulnerabilities for the banking sector.  As in the past, authorities will continue to step in to prevent broader financial risks and social unrest.

Global Economic Forecast – July 2022

GEO Economic Forecast - July 2022

Meet Our Team

Carl R. Tannenbaum

Carl R. Tannenbaum

Chief Economist
Ryan James Boyle

Ryan James Boyle

Chief U.S. Economist
Vaibhav Tandon

Vaibhav Tandon

Chief International Economist


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