Macroeconomic Outlook
Per 30 June-23
GDP growth outlook dims and Germany is in a technical recession, uncertainty persists given ongoing high inflation and geopolitical tensions
- The IMF has projected a recession for about one-third of the global economy in 2023, resulting in the weakest growth outlook for both 2023 and 2024 since 2001, excluding the 2008 financial crisis and the COVID-19 pandemic's onset in 2020. A combination of factors, including financial market stress, persistent high inflation, and geopolitical tensions, could potentially push more mature economies into recession, with Germany having entered into a technical recession.
- In Germany, the current producer price inflation for industrial products has eased considerably lately to approximately 1% from its peak above 45% in 2022. Following Russia’s war in Ukraine, energy prices, particularly in Germany, surged significantly but have since fallen by 34.3% since September 2022. Excluding energy, producer prices were 3.2% higher than in May 2022 and down 0.4% from April 2023.
Real GDP growth forecast for selected geographies (per Jun-23)
Production outputs for the manufacturing industry (per Jun-23)
Producer price index for industrial products1 (per Jun-23; change y-o-y)
Source: PwC Research, Board of Governors of the Federal Reserve System, Statistisches Bundesamt, U.S. Bureau of Labor Statistics, OECD, ING
While overall inflation is gradually easing thanks to lower energy prices, core inflation persistently remains at a high level
US and German consumer price index
(change y-o-y)
European power prices1 (in EUR/MWh, as per Jun-23)
Despite the easing inflationary pressure provided by lower fossil fuel energy prices, there is an ongoing challenge of persistently high core inflation. As of June 2023, Germany and the US face core inflation rates of 5.4% and 5.3% respectively, while nominal wages are on the rise - 5.6% in Germany and 6.1% in the US as of May 2023. These increases are also driven by low levels of unemployment, forecasted to be 3.5% in Germany and 4.2% in the US for 2023. This situation undermines expectations of a return to pre-pandemic inflation levels and intensifies the risk of a wage-price spiral.
The willingness of consumers to spend is impacted by several factors, including the slowdown of Western economies, cost pressures, and rising interest rates. For instance, in May 2023, Germany witnessed a significant year-on-year decrease of 8.6% in real retail sales, while the United States recorded a comparatively modest year-on-year decrease of 2.5% as of June 2023.
Unemployment rate for selected geographies
(per Jun-23)
Nominal wage growth (per May-23, overall unweighted)
Source: PwC Research, U.S. Bureau of Labor Statistics, Statistisches Bundesamt, OECD, Statista, Investing | 1) Prices until June-23 as yearly average of spot prices; EEX Power Futures: quarterly per June 23, annually per 30-June 23.
Policy rates are expected to reach their peak in 2023 with easing interest rate policies thereafter due to slowing inflation and economic pressures
Major central bank policy rates
Policy rate hikes by selected central banks
In an effort to address inflation triggered by excessive demand in the US and supply shortages, coupled with high energy prices in Europe, central banks have implemented significant policy rate increases since 2022.
Despite the stresses on the banking system, central banks remain determined to curb inflation, with further rate hikes expected for 2023. However, some market participants are already anticipating easing interest rate policies in 2024 and 2025.
1 Year Sr CDS Curve
Source: PwC Research, Board of Governors of the Federal Reserve System (US), ECB, BoE, Bloomberg, S&P Capital IQ | 1) Reflects current market consensus for policy rate decisions of central banks, cumulated expectation until end of 3Q25
Stricter monetary policies increased government bond yields, thereby making fixed income investments more attractive again
10-Year Government Bond Yields
1y, 3y and 5y EUR Swap Rates (left) 1M, 3M and 6M Euribor Rates (right)
- European and US Government bond yields remained steady over 1H23, with the exception of UK, where inflation is particularly persistent and the BoE raised its policy rate further than expected.
- During the first half of 2023, an inversion of the Euro interest rate curve occurred, indicating that market expectations pointed towards lower interest rates in the long-term. This inversion was shortly followed by news of technical recession in Germany.
Source: PwC Research, Bloomberg | 1) 10y Gov Eurozone refers to an index based on a portfolio of Eurozone bonds
Interest rate hikes have caused a sharp decline in mortgage volumes in Germany and the US; falling demand shows impact on real estate prices
Real Estate Price indices (US & GER) 2020Q4 = 100
German Effective interest rate housing loans
German Mortgage Volumes (in EUR bn)
The surge in interest rates has led to a substantial decline in mortgage volumes in both Germany and the United States, reaching their lowest levels in several years.
In the UK, borrowers are grappling with increased refinancing costs, primarily due to the prevalence of short-term fixed loans, which is anticipated to result in a significant drop in housing prices, a trend that is already evident in Germany.
US 30y
Contract Rate
US Mortgage Applications
(Purchase Application Index)
Source: PwC Research, Deutsche Bundesbank, Bloomberg, Statista, Fed St. Louis, S&P/Case-Shiller U.S. National Home Price Index
Stock markets continued their recovery over 1H23 despite the banking turmoil end of 1Q23; European M&A activity remains subdued and IPO markets have halted
- Equity indices suffered from a negative valuation impact due to higher interest rates, leading investors to consider fixed income markets as a increasingly attractive alternative.
- This trend persisted throughout much of 2022. However, since 4Q22, equity markets have recovered to a certain extent despite the turmoil in the banking industry in 1Q23.
- European M&A activity has been significantly below previous years in 1H23. The impact from a rising interest rate environment has only become visible from 3Q22 due to a timing lag effect from dealmaking.
- Given the challenging market environment, European IPO activity dropped significantly in 2022 and over 1H23 following the record year of 2021.
Development of major equity indices (index 31-Dec-19 = 100)
European M&A volume by quarter (left) and European IPO volume by quarter (in USD bn)
Source: PwC Research, Yahoo Finance, Eikon
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