The past month has brought a string of positive developments on the activity and inflation side. The biggest news has been China’s decision to throw in the towel on its zero-COVID policy, which brightened the prospects for the world’s largest economy (in PPP terms) in 2023. We had thought that disruption from the re-opening wave of infections would weigh heavily on activity well into Q1. But high-frequency data suggest that a rebound there is already underway. What’s more, in Europe, GDP looks less likely to have contracted in Q4 than it did a month ago in the likes of the UK and Germany and, at the margin, the slump in natural gas prices could lend a hand to activity in the quarters ahead. In the US, the payroll and JOLTS data suggested that its labour market remained resilient at the back end of 2022. Meanwhile, many of the latest CPI prints and numerous timely indicators point to inflation having embarked on a sustained downward trend. While we have revised up our 2023 global growth forecast, we still think that most of the effects of policy tightening are yet to be felt and that major DMs will fall into recession in the first half of this year.
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