Macroeconomic environment

Global growth has shown resilience and has generally been higher than expected by analysts, despite the moderating trend in recent quarters.

Economic activity has benefited from the surprisingly rapid decline in energy prices following the sharp increase observed after the outbreak of the war in Ukraine, as well as from the process of normalization of global supply chains and the dynamism of labor markets, which have contributed to the relative strength of private consumption and the service sector. In addition, the easing of anti- COVID-19 policies in China has contributed to a more gradual than expected slowdown in growth, despite its initial negative impact on activity.

Lower energy prices and improvements in bottlenecks in production processes have contributed to a reduction in headline inflation, which, in annual terms, reached 5.0% in the United States and 6.9% in the Eurozone in March. However, despite the recent slowdown in headline inflation, measures of underlying inflation continue to show no significant improvement.

Against this backdrop of still elevated inflationary pressures, central banks have continued to tighten monetary conditions, causing tensions in the banking sector and increasing financial volatility, which eased more recently, following decisive actions taken by authorities in Europe and the United States and in line with the perception that the problems in the banking sector are not systemic.

Despite the recent turmoil in the banking sector, which has contributed to a further tightening of financial conditions, reducing to some extent the pressure for additional monetary tightening, central banks have remained focused on reducing inflation. The U.S. Federal Reserve and the European Central Bank (ECB) have raised their benchmark interest rates (refinancing rates in the case of the ECB) to, respectively, 5.00% and 3.50% in March.

Although uncertainty is high, policy rates are likely to continue rising in the short term, to around 5.25% in the United States and 4.00% in the Eurozone, and to remain at these levels at least until the end of the year. In addition, central banks in both regions are expected to continue to reduce their balance sheets and address stress in the banking sector through macroprudential measures.

BBVA Research expects global growth to be 2.8% in 2023 (0.5 percentage points higher than the previous forecast), after reaching 3.2% in 2022 and 6.1% in 2021. Recent activity data and fading supply shocks favor an upward revision of GDP forecasts for 2023 to 0.8% in the United States and 0.6% in the Eurozone (respectively 0.3 and 0.7 percentage points higher than previously forecast), while in China growth this year is most likely to be 5.2%, 0.2 percentage points above the previous forecast mainly due to the positive impact of the easing of anti-COVID-19 policies. Also, despite the upward revisions, the outlook for a slowdown in global growth remains, in a context where financial volatility is expected to remain relatively high and interest rates and inflation are expected to remain at higher than expected levels for a longer period.

Uncertainty remains high and a number of factors could determine the materialization of more negative scenarios than the one forecast by BBVA Research. In particular, persistently high inflation and interest rates could generate a deep and widespread recession, as well as new episodes of financial volatility.