July 5, 2023/Cordros Report
Global economic activities in H1-23 remained reflective of the pass through and lingering impacts of macroeconomic headwinds from 2022. These macroeconomic headwinds include (1) persistent inflationary pressures, albeit slowly, depressing consumer demand, (2) cumulative impacts of interest rate increases, leading to higher borrowing costs, and (3) lingering trade tensions from the Russia-Ukraine conflict and tensed US-China relationships. More recently, uncertainties regarding global financial system stability have added further pressure to the global economy, given the failure of some regional banks in the United States (US). In addition, demand conditions in China – the world’s manufacturing behemoth – have not lived up to expectations, dimming hopes of improvement in the global outlook relative to the start of the year.
Amidst all these, global central banks maintained their hawkish monetary policy stance, albeit in softened tones relative to 2022, when the unprecedented interest rate hiking cycles started. Notably, critical central banks, including the US Fed (+75bps), Bank of England (+150bps), and European Central Bank (150bps), have slowed down their rate hikes so far in the year primarily because of the (1) moderating inflationary pressures and (2) US regional banking sector wobbles, threatening financial system stability.
Over the rest of the year, global growth will likely remain on a decelerating trend relative to the prior year. While inflationary pressures are currently moderating, we expect consumer wallets to stay depressed, albeit slowly, relative to the preceding year, slowing down external demands. At the same time, borrowing costs are expected to continue to limit private investments, more so that uncertainties regarding financial system stability are expected to linger. Accordingly, advanced economies are seen to contribute most to the global growth slowdown, with the Euro Area and United Kingdom (UK) expected to bear the most brunt. Nonetheless, developing economies are expected to grow higher than 2022FY levels, bolstered by China’s reopening after two years of intermittent COVID-19 lockdowns. Overall, the International Monetary Fund (IMF) revised its global growth forecast downwards to 2.8% y/y in 2023E (2022FY: 3.4% y/y), down from the 2.9% growth projection at the start of the year.
Further out, monetary policy rates are expected to peak in H2-23, in line with the (1) lingering moderation in inflationary measures, (2) weak growth momentum, and (3) heightened financial stability uncertainties worsened by the regional banks’ wobbles. However, given current guidance from systemic global central banks, we do not envisage the return to an accommodative monetary policy stance until 2024E, as inflation rates are not expected to return to central banks’ targets soon.
On crude oil, the market is steadily resetting from the unprecedented levels seen in the last three years amid the shocks from the COVID-19 pandemic and the Russia-Ukraine crisis. Chiefly, benchmark oil prices are back to the pre-crisis level as rising supplies offset a slowdown in oil consumption across advanced countries. For the rest of the year, we expect supply growth to remain tethered upwards, driven mainly by increased output from the US, counterbalancing the drag expected from OPEC and its allies. On demand, we raise our growth expectations for demand, factoring in the persistence of China’s consumption. On a balance of factors, we expect the market to maintain the imbalance witnessed since the start of the year, and thus forecast Brent crude oil will average USD80.00/bbl. in 2023E. A weaker-than-expected crude oil production growth and the strength of China’s reopening represent the most significant potential tailwinds for oil prices for the rest of the year. We cite weaker global economic conditions and its effects on energy demand and stronger-than-expected oil exports from Russia as the downside risks.