Recent data suggest the economy’s resilient end to 2022 was sustained at the start of this year. But while the worst of the falls in real household incomes are in the past, we still think around two-thirds of the drag on real activity from the rise in interest rates from 0.10% to 4.25% has yet to be felt. What’s more, the recent deterioration in the health of the global banking system may amplify the drag on real activity from higher interest rates, or at least bring it forward. Before any potential pull-back in bank lending resulting from the recent strains in the global banking sector, the change in the flow of bank credit to the private sector (the “credit impulse”), points to a q/q contraction in real GDP in Q1. Overall, our view that real GDP will decline by around 1.0% over the first three quarters of this year is still more bearish than the consensus forecast.
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