A breakdown in the economy is unlikely to happen anytime soon. This is the major learning from the first eight weeks of 2023. The US is enjoying strength in the job market and is likely to turn in a growth rate of almost 3% in the first quarter. Europe is benefiting from cheaper energy, and China is surfing the reopening wave. If anything, Chinese policymakers may even add to the recovery at the National People’s Congress starting on 5 March. So, all in all, a decline in economic activity does not appear likely in the near future.

Positive economic data surprises have put recession fears on hold. The continued strength of the labour market and the high growth momentum in many service sectors point to a continuation of the economic expansion rather than a recession. We see the possible economic scenarios of a soft and a hard landing. Forward-looking indicators at the start of the year point to better growth momentum.

The prospects for 2023 keep improving. To take account of the latest changes in prospects, we have roughly doubled our 2023 growth rate forecasts for Europe and the US (albeit from low levels).

In addition to improved business confidence, the economic outlook for the euro area is also benefiting from the sharp fall in energy prices. As a result, the prospects for a decline in inflation and an improvement in consumer confidence are good. The positive start to 2023 and falling energy prices mean higher growth for the year as a whole. We have thus revised our forecast for the euro area to 1.1%. At the same time, we see increasing risks to the longer-term economic outlook and expect growth to stagnate next year.

We have revised our estimates for US growth to 1.9% in 2023 and expect it to slow to 0.3% in 2024. A side effect of the current positive economic surprises is an increase in the probability of further interest-rate hikes by central banks. The US Federal Reserve and the European Central Bank remain determined to restore their battered credibility on price stability through further rate hikes. As a result, we now expect further rate hikes from both central banks in March and May.

In China, we do not expect to see the same overstimulation of the economy as occurred in the West. Rather, a fine-tuning of policy measures is due. Therefore, the overall growth prospects for China, which we sharply revised upwards in the last few months, are unchanged.

Will this growth carry on to 2024?

On the flipside, a lot of the growth discussions are about ‘more now, less later’. The persistent strength in the economy does not bode well for the 2024 outlook, especially given central banks’ mission to restore credibility in terms of inflation fighting. We wonder whether restoring credibility by committing another policy mistake would really be helpful. Yet policymakers may need some time to figure this out after all the inflation bashing they have been through in recent months.

It will take around 12 months for the effects of these more aggressive rate hikes to be felt in investment, consumption, and employment. As a result, we are revising our growth forecasts for 2024 sharply downwards. Benchmark yields will also drift higher as long as the economy shows little sign of being adversely affected by the ongoing tightening of monetary policy. We expect the US 10-year Treasury yield to trade above 4% in the coming months and only to decline in the longer term as monetary policy begins to have an impact on economic activity.