The global economy is on track for a significant slowdown compared with last year, although the deceleration is not expected to be as severe as initially anticipated, research company BMI, a Fitch Solutions company, has said.

Presenting these findings in a webinar, BMI global country risk MD Cedric Chehab said that, despite the slowdown, economic activity had demonstrated considerable resilience, as the global economy continued to improve overall in the second quarter.

BMI’s current forecast is for global growth to come in at 2.2%, which marks a slight upward revision from the 2.1% forecast provided in May but remains marginally below consensus expectations of 2.6%.

“Our slightly more optimistic global growth outlook is underpinned by several revisions over the past month. The most important of these was our decision to move our US forecast from 1% to 1.4% after high-frequency data continued to point to a much more resilient economy,” Chehab explained.

However, despite these less dire forecasts, it is expected that the coming slowdown will still be quite sharp – even if it is not as severe as initially expected.

“We expect global gross domestic product growth to decline from about 3.1% last year to about 2.2% this year – mainly driven by the sharp slowdown in developed markets,” he said.

Chehab noted that this deceleration in developed markets was the result of a combination of tight monetary policies, a decrease in credit growth resulting from banking stresses in March, and a tightening of fiscal policies by governments grappling with higher interest rates.

Another contributing factor was the diminished strength of global trade and inventory cycles this year, compared with the previous year when there was a substantial inventory build-up caused by supply shortages.

In contrast to developed markets, Chehab said emerging markets, as a whole, were expected to maintain reasonably stable growth at about 3.8%, which was at about the same level as last year.

However, he noted that this was mainly because of the strong performance of China, which skewed the overall figures for emerging markets. If China was excluded from the analysis, emerging markets were projected to experience a sharp slowdown, he pointed out.

The outlook for the US and the Eurozone, meanwhile, indicates they will undergo mild and shallow recessions in the fourth quarter of this year and the first quarter of next year.

“We forecast a light recession, which means two consecutive quarters of contraction. We expect a slight recession in quarter four this year and in quarter one next year, but then we expect a reasonably good recovery in the latter part of 2024,” Chehab said.

Consequently, BMI expects the recession to be mild and shallow owing to factors such as solid household balance sheets, minimal economic imbalances and a resilient labour market in the US.

Conversely, China is expected to experience a significant acceleration in growth, with an increase from 3% last year to 5.2% this year.

The strength of the global labour market had been a key factor in causing economic activity to improve, Chehab said. Despite the negative effects of inflation on consumption and higher interest rates on businesses and households with debt, he said strong labour markets had allowed households to navigate these challenges.

He explained that unemployment rates globally continued to decrease or remain at low levels, indicating tight labour markets that supported household incomes. This trend was observed not only in developed markets but also in some emerging markets.

Other indicators, such as participation rates, job openings, hours worked and unemployment claims, further demonstrated the resilience of the labour market.

According to BMI's index for global inflation, it reached its peak in mid-2022.

“What we notice is that the supply chain index typically leads inflation by about six months. This suggests that global inflation will continue to decline from the current level of about 4%. However, it's not only supply chains that are improving. There are other reasons why inflation will fall, including moderating wage growth,” Chehab explained.

However, weak commodity prices were exerting pressure on the housing market, which would likely soften rent, home prices, and certain components of the inflation basket. Chehab acknowledged that the decline in inflation may vary across different economies.

"We only expect inflation to really fall back to the majority of central bank targets around late 2023 or early to mid-2024, depending on the economy," Chehab stated, noting that the forecast showed a significant decrease in inflation from the highs experienced in 2022.

Nevertheless, Chehab noted that, while headline inflation had peaked and was declining, core inflation remained elevated and resistant to change.

He explained that core inflation, which excluded energy and food, had not decreased as much and remained at about 5% to 7% in major developed markets, even rising in the UK. BMI still expects interest rates to continue rising in the coming months as central banks work to curb inflation.