Global Economics Intelligence executive summary, December 2023

February 1, 2024

2024 looks uncertain: inflation has come down but long-term interest rates remain high; retail sales are relatively stable; manufacturing continues to contract; geopolitical concerns are on the rise.

The latest McKinsey Global Survey on economic conditions1 finds that geopolitical instability is viewed as the top threat to economic growth by respondents (Exhibit 1). Earlier optimism about the global economy—and respondents’ own companies’ workforce growth and profits—has receded somewhat; nevertheless, respondents maintain a largely positive view about their own economies. At the same time, concern over high interest rates has almost halved from earlier in 2023: 18% of respondents now cite inflation as a risk to growth compared with 34% in March. In this latest survey, just 32% of respondents expect a rate hike in the next six months (versus 60% in March), with 40% believing their country’s rates will hold steady.

Exhibit 1

Geopolitical concerns still dwarf other threats to global growth, while inflation falls further and political transitions become more of a risk.

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Meanwhile, despite OECD composite leading indicators having pointed toward a rebound across developed and emerging economies since 2022, November saw overall consumer confidence decline again across most surveyed economies. For example, Brazil saw consumer confidence drop slightly to 93.0 in November, from 93.2 in October, down for a second consecutive month. In the US, however, the Consumer Confidence Index (Conference Board) rose to 102.0 in November, up from a downwardly revised 99.1 in October.

Growth in retail sales across most surveyed countries has remained relatively stable; however, Russia and China stand out as rebounding. US retail and food service sales decreased to $705 billion, a 0.1% decline from October’s revised $705.7 billion. In China, retail sales accelerated to 10.1% year-on-year growth in November (7.6% in October).

November saw inflation continue to decline in developed economies after a period of high inflation. In the US, the Consumer Price Index (CPI) ticked down to 3.1% (annualized) in November (3.2% in October), while core inflation remained unchanged at 4.0% (annualized). Eurozone headline inflation eased to 2.4% year over year in November (down from 2.9% in October)—the lowest rate in more than two years. Core inflation remained elevated at 3.6% in November but is coming down (4.2% in October). In the UK, CPI inflation dropped unexpectedly below 4.0% to reach 3.9% in November (4.6% in October); core inflation remains high but was down to 5.1% in November (5.7% in October).

The inflation picture across emerging economies is looking increasingly diverse. In China, consumer prices continued to deflate, falling to –0.5% in November (–0.2% in October), weighed down by food prices (–4.2% in November). Producer prices also deflated at a faster rate in November at –3.0% (versus −2.6% in October). In Brazil, inflation fell for a second consecutive month, to 4.68% (4.82% in October)—dropping into the central bank’s target range where the upper limit is defined as 4.75%. In contrast, headline inflation in India climbed to 5.88% in November from 4.9% in October. Meanwhile, Russia has seen inflation accelerate to 7.5% year over year in November, broadly because of an extremely tight labor market that has seen sharp wage rises across many sectors.

Commodity prices continued to fall in December, with the exception of precious metals. Overall, energy prices maintained an upward trend over recent months, whereas prices for industrial metals have seen a decline, mostly driven by lower demand from China’s construction sector. Food prices, meanwhile, are trending down, although levels are similar to 2011’s period of high inflation.

Looking ahead, inflation expectations have stabilized at 2.0–2.5% for both the medium and long term.

This month again saw interest rates unchanged across the developed economies. On December 15, 2023, the Bank of Russia increased the key rate by 100 basis points to 16%—the rate has now risen by 850 basis points since July. However, Brazil cut its interest rate to 11.75% in December, down from November’s 12.25% (Exhibit 2).

Exhibit 2

Central banks are further tightening monetary policy, with Brazil and China being the exceptions.

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There was a varied growth picture across the developed economies, with the US appearing somewhat buoyant while Europe looked subdued. The Fed projects the US economy to expand by 1.4% for 2024. The eurozone experienced a third-quarter 2023 contraction (of 0.1% quarter over quarter), the main contributor being a change in inventories. The UK economy unexpectedly contracted in October, with all three main sectors reporting declines in output.

The picture was more consistently positive across the developing economies, with India being the standout: India’s real GDP has surprised many by clocking an impressive growth of 7.6% year-on-year in the July-to-September quarter. China’s industrial output growth accelerated to 6.6% year over year in November (4.6% in October). In the third quarter, Brazil’s GDP rose 0.1% compared with the previous quarter and climbed 2.5% year over year. According to flash estimates, Russia saw annual growth increase to 5.5% in the third quarter, from 4.9% in the second quarter.

Overall, across surveyed economies, the manufacturing sector has shown contraction for the 15th month in a row, while services momentum decreases. In the US, the industrial production index decreased slightly in October to 102.7 (103.6 in September), while November’s purchasing managers’ index (PMI) for manufacturing fell slightly to 49.4. In Europe, the picture ameliorated slightly but remains negative. In the eurozone, November’s manufacturing PMI was up slightly to 43.8 (43.1 in October), as was the composite PMI, which came in at 47.1 (0.6 points above the October reading). The seasonally adjusted UK manufacturing PMI posted 47.2 in November, up from 44.8 in October. Unexpectedly, the UK’s latest flash PMI composite index (published December 15) climbed to 51.7, from 50.7 in November—the fastest rise in private-sector business activity since June.

China’s official manufacturing PMI edged down to 49.4 in November (49.5 in October), while the Caixin manufacturing PMI headed into expansion territory at 50.7 (from 49.5 in October). India’s manufacturing activity saw an uptick in November after an eight-month low, with the manufacturing PMI rising to 56.0 (55.5 in October). Brazil’s manufacturing PMI rose to 49.4 in November from 48.6 in October, up for the first time since August but below the neutral 50 mark for the third consecutive month. Russia’s manufacturing sector maintained high growth (up 9.5% year over year), especially those areas associated with the military-industrial sector.

Most countries have shown a flat trend in services in recent months, although India’s services PMI remains solidly in expansion territory despite declining to a 12-month low of 56.9, from 58.4 in October. In the US, the November services PMI edged up to 50.8, from 50.6 in October, while the eurozone services PMI rose slightly to 48.2 in November (47.8 in October). The headline seasonally adjusted UK Services PMI registered 50.9 in November, up from 49.5 in October and in expansion territory for the first time In four months. China’s official services PMI fell into the contraction zone, posting 49.3 in November (50.1 in October), while the Caixin services PMI rose to 51.5 (50.4 in October). Brazil’s services PMI climbed slightly to 51.2 in November from 51.0 in October.

US unemployment edged down to 3.7% in November, slightly lower than October’s 3.9%. In the UK, the quarterly unemployment rate for August to October 2023 was flat at 4.2%. China’s surveyed urban unemployment rate was again unchanged at 5.0% in November, while Brazil’s three-month moving average unemployment rate declined slightly to 7.6% in October, its lowest since 2015. In Russia, unemployment stood at a record low of 2.9% in September.

Equity markets continued to grow in December, with the exception of China and Russia. In the US, returns for the S&P 500 and the Dow Jones were up by 8.92% (–2.20% in October) and 8.77% (–1.36% in October), respectively. In India, the Nifty had risen by 5.7% and the Sensex by 5.5% as of December 12. Brazil’s Bovespa equities index added 4.4% in value in November.

US exports were $258.8 billion in October, $2.6 billion (–1.0%) lower than in September, while October imports were $323 billion, $0.5 billion (0.2%) above the September figure. China’s exports rebounded from contraction in November, growing by 0.5% year over year (–6.4% in October), to break a six-month streak of consecutive declines; imports fell by –0.6% in November (3.0% increase in October).

The UN climate change conference held in Dubai in December saw negotiations conclude with a final agreement to “transition away from fossil fuels.” COP28 marks the first time the shift away from fossil fuels has been explicitly included in a final agreement at the annual meeting of signatories to the United Nations Framework Convention on Climate Change. But how can this commitment be translated into action? McKinsey Sustainability sets out the key takeaways from the conference in the blog “COP28: Wrap-up.”

Source: GWFM Research & Study

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