Recessions postponed, not cancelled

A raft of strong data out of the US have poured cold water on the idea that its economy has tumbled into recession at the start of 2023. And this comes after GDP data revealed that the euro-zone and UK economies (narrowly) avoided outright contraction in Q4, in addition to a clear turnaround in the business surveys and further evidence that, if anything, labour markets have tightened in the past couple of months. Accordingly, it looks like the recessions we have long been forecasting in advanced economies will commence a little later than we had initially envisaged. But it still looks likely that the full force of monetary tightening is yet to be felt. Higher interest rates have weighted heavily on credit growth, which in turns points to a marked deceleration in GDP growth. And the latest bank lending surveys generally point to further falls in demand for loans and further tightening of credit conditions for firms and households, which are consistent with even weaker credit growth. This is likely to take its toll on activity in the months ahead. And to the extent it doesn’t, that will just raise the risk that monetary policy is kept tighter for longer.