The global economy has dodged a couple of bullets since our last quarterly update. The banking turmoil that had enveloped the US in March and then spread to Europe was contained with surprisingly little visible side effects so far. The US debt ceiling debacle, which had tested investors’ nerves and had the potential to unfold in a materially severe manner, was similarly sidestepped. Emboldened by the macro resilience and, frustrated that inflation isn’t subsiding fast enough, major central banks have continued with the monetary tightening exercise, in some cases coming back to it after a brief hiatus. The tone remains decidedly hawkish.
But all is not well. Admittedly, our global growth forecast has ticked up a tenth since March, but this is an insignificant improvement that does not alter the far more salient point that growth has slid well below trend. China’s disappointing recent performance may have garnered the lion’s share of attention in regard to growth vulnerabilities, but businesses and consumers everywhere are being increasingly constrained by the high cost of borrowing. Demand is not collapsing, but it is slowing. Most importantly, it will continue to slow in the months ahead even as disinflation offers a welcome support to real incomes. With debt servicing costs skyrocketing, even if from low levels, the next chapter in the story has to do with a deterioration in credit quality. This need not be dramatic. Big variations in starting point for household indebtedness and business leverage also mean that the story unfolds at different speeds across geographies and sectors, but the direction of travel is broadly shared and is one of deterioration.