Mixed signals for now but broader weakness to come

Recent data appear to confirm that economic activity held up better than feared at the start of 2023. Retail sales rose in most major economies over the first two months of the year, world industrial production was broadly stable and China’s zero-COVID rebound proceeded apace. What’s more, business surveys for March suggest that global growth is picking up rather than turning down. However, there are other signs of weakness on the horizon. Labour markets finally seem to be cooling, with vacancy rates down, job quits falling and wage growth easing in some economies. Meanwhile, credit conditions have continued to tighten and bank lending is slowing or even falling in some cases. We expect the delayed effects of monetary tightening to become a bigger drag on activity, pushing most advanced economies into recession in the second half of the year. This should help to end the recent run of disappointing core inflation outturns and clear the path for central banks to end their tightening cycles.