The July 2023 edition of the FocusEconomics Consensus Forecast
United States - Outlook improves
After growing 1.3% in quarter-on-quarter annualized terms in Q1, the economy likely saw a similarly resilient outturn in Q2, notwithstanding banking sector stress and tighter monetary policy from the Fed. Payroll gains beat market expectations in April–May, which, together with ebbing inflation, has likely aided private spending—as suggested by rising retail sales in the first two months of the quarter. Moreover, the composite PMI averaged well above its Q1 level in Q2, pointing to an upturn in business activity. In other news, at the start of June, the Senate approved a bill to raise the debt ceiling, averting default. Finally, in mid-June, U.S. Secretary of State Blinken visited China in a bid to strengthen ties; however, diplomatic tensions and trade frictions between the two superpowers will persist given their opposing economic and political models.
The economy will lose steam this year on a sharper fall in investment and softer growth in exports and private spending. That said, GDP forecasts have been upgraded by 0.9 percentage points since the turn of the year. The key downside risks are faster-than-expected Fed tightening, more bank collapses and a total breakdown in relations with China. FocusEconomics panelists see GDP expanding 1.2% in 2023, which is up by 0.1 percentage points from one month ago, and expanding 0.7% in 2024. Inflation eased to 4.0% in May from April’s 4.9%, the weakest rate since March 2021. The drop was primarily driven by slower rises in prices for housing and food, and a fall in transport prices. However, inflation was still double the Fed’s 2.0% target. Inflation should continue to decline later this year but will stay above the Fed’s target throughout 2023.
FocusEconomics panelists see consumer prices rising 4.1% on average in 2023, which is down by 0.1 percentage points from one month ago, and rising 2.6% on average in 2024. At its 13–14 June meeting, the Fed left the federal funds target range at 5.00–5.25%, but suggested it could hike rates further at upcoming meetings. Our panelists are split, with some seeing rates unchanged and other expecting 25–50 basis points of extra tightening. The Consensus is for the fed funds target range to be slightly above its current level at end- 2023. FocusEconomics panelists see the upper bound of the fed funds target range ending 2023 at 5.30% and ending 2024 at 3.95%. The U.S. dollar index traded at 103 on 23 June, depreciating 0.6% month on month. The debt ceiling agreement removed a key source of economic uncertainty and boosted risk appetite, likely weighing on safe-haven demand. Looking ahead, global interest rates, safe-haven demand and U.S. financial stability will be key drivers of the USD.
United Kingdom - Outlook improves
The economy registered a mild quarter-on-quarter expansion in Q1, thanks to growth in fixed investment and private spending. In contrast, public spending, exports and imports all contracted. Turning to Q2, the economy has likely had a muted outturn. Activity will have been weighed on by sticky inflation, tightening monetary policy, strike action, weak external goods demand, competitive losses stemming from Brexit and the extra bank holiday in May for the King’s coronation. That said, a robust labor market and improving consumer sentiment have likely supported household spending, with retail sales beating market expectations in April–May. In June, the government announced tariff cuts on imports from developing economies. That said, the expected reduction in import costs of GBP 770 million per year is only worth slightly over 0.1% of total goods imports.
GDP is set to rise this year, following a series of forecast upgrades in recent months. A robust labor market and government fiscal support will aid activity. That said, the UK economy will still underperform G7 peers, weighed on by Brexit, sticky inflation and worker strikes. Prolonged strikes and higher-than-expected interest rates pose downside risks. FocusEconomics panelists see GDP expanding 0.2% in 2023, which is up by 0.2 percentage points from one month ago, and expanding 0.9% in 2024.
Inflation beat market expectations to remain at 8.7% in May, above the rates of G7 peers. The tight labor market and rapid wage growth have kept price pressures elevated in recent months. Looking ahead, inflation should gradually trend down on tighter monetary policy but is still forecast to average over double the Bank of England’s 2.0% target in Q4 2023. FocusEconomics panelists see consumer prices rising 7.0% on average in 2023, which is up by 0.1 percentage points from one month ago, and rising 2.8% on average in 2024. • On 22 June, the Bank of England (BoE) increased the bank rate from 4.50% to 5.00%, in response to higher-than-expected recent inflation and wage growth. This took total tightening in the current cycle to 490 basis points. Looking forward, further hikes are forecast this year as the BoE tries to root out stubborn price pressures, with risks likely skewed to the upside. FocusEconomics panelists see the bank rate ending 2023 at 5.50% and ending 2024 at 4.58%.
The pound sterling traded at USD 1.27 per GBP on 23 June, appreciating 2.4% month on month. Expectations of tighter monetary policy boosted the pound over the last month. The GBP is seen ending this year slightly weaker than its current level. Safe-haven demand for the U.S. dollar and the relative paces of rate hikes between the BoE and the Fed are key risk factors. FocusEconomics panelists see the pound sterling ending 2023 at USD 1.25 per GBP and ending 2024 at USD 1.30 per GBP.
