Outlook

The last year and a half should have been disastrous for the global economy. Russia’s invasion of Ukraine upended supply chains and sent energy prices soaring. Chinese authorities forced hundreds of millions into lockdown. High and persistent inflation forced central banks to raise interest rates at a pace unequalled since the 1980s. Housing markets tumbled. Bank failures triggered unease at the very core of the financial system. Political brinkmanship brought the US to the edge of default. Yet, over and over, worst-case fears in markets and boardrooms have gone unrealized. European economies retooled at lightning speed and a warm winter...

The “transitory” supply-side forces that lifted inflation through much of the post-pandemic period are retreating. With supply chains almost fully healed, global shipping costs have plunged, agricultural price indices are down more than 20 percent from their highs, and in most industrialized countries, grocery costs are softening in month-over-month terms. Energy prices remain elevated relative to historical averages, but are down dramatically from last year. And consumer expectations are coming down in most regions. On the demand side, a powerful feedback loop remains in play, with aggregate nominal household incomes rising as persistent labour market imbalances put upward pressure on...

The pace of monetary tightening from major central banks is clearly decelerating, and rate hikes look likely to peter out almost completely by the early autumn, helping reduce overall policy uncertainty. Following a pause in June, the Federal Reserve looks likely move to the sidelines after delivering a final quarter-point increase at its July meeting, bringing rates to a 5.50-percent terminal level. The European Central Bank looks likely to follow a similar (but lagged) trajectory, with two half-point moves in July and September, followed by a shift onto a data-contingent footing. Investors currently have the Bank of England priced to...