Morgan Stanley has revised its 2023 economic growth forecast for the euro area upwards by 20 basis points to 0.8% due to better-than-expected economic data. Despite the European Central Bank's tightening monetary policy not yet having a strong impact on the real economy, the brokerage has lowered its 2024 gross domestic product (GDP) growth forecast to 1% from 1.1% due to an anticipated drag.
MS economists led by Jens Eisenschmidt have predicted that there could be more robust GDP prints in H1 2023 followed by some weakening as the negative impact of restrictive monetary policy in the euro area gains momentum and the outlook for the US economy is less positive than previously thought.
The ECB is expected to deliver three more hikes this year as it combats inflation, which remains above its 2% target at 6.9% as of March. Data revealed in March showed that the euro zone narrowly avoided a technical recession at the end of last year, registering no growth quarter-on-quarter in the final three months of 2022.
In recent times, HSBC raised its euro zone GDP forecast to 0.6%, while Goldman Sachs expects growth of 0.7%, including a 0.3% hit from ongoing stress in the global banking system. Certainly, the interplay of inflation and central-bank intervention will ultimately shape the story of economic growth for 2023.
“The last 12 months have seen the fastest increase in the Federal funds rate since 1981, and the fastest increase in European Central Bank (ECB) rates since the establishment of the Eurozone,” says Seth B. Carpenter, Morgan Stanley’s Chief Global Economist. “But as consumer goods’ supply chains recover and labor markets see less friction, we could see a sharper and broader fall in inflation, which would imply a somewhat easier path for policy and higher growth globally.”
While there are few big surprises in our 2023 outlook, there is plenty of nuance. As always, the story varies by region, in some ways dramatically. In contrast to forecasts for Western economies, Asia could offer green shoots for growth, particularly in India, and emerging market economies could further benefit as the Fed finds its peak rate and the dollar eases.
