Growth in developed economies has been resilient, thanks to strong labor markets. But with central banks likely to keep interest rates higher for longer, how long can that last?
Central banks in the developed world have raised interest rates higher and faster than at any time in recent memory. But until labor markets start to slow, policymakers are unlikely to take their feet off the brakes. That may mean more rate hikes or, perhaps more importantly, rates that stay higher for longer.
To understand why, let’s take a closer look at the recent performance of the global economy. Regional banking turbulence in the US and the failure of Credit Suisse in March did not put an end to the economic expansion, nor did it signal the beginning of a systemic crisis. Likewise, the global economy didn’t shrink when confronted with Russia’s invasion of Ukraine, China’s prolonged adherence to its zero-COVID policy, or the rapid rise in policy rates across the US and Europe.
This isn’t to say the economic outlook is especially bright. The risk of a hard landing is lower today than it was three months ago, but we still expect growth to slow as time passes. Rate hikes are already weighing on activity in many sectors, and households have begun to deplete savings that accumulated during the pandemic.
Whether or not this leads to a recession remains a close call. But the evidence in hand suggests that if a downturn occurs, it’s likely to be mild by recent historical standards. Rather than a sharp contraction, our forecasts reflect a long period of below-trend growth lasting through 2024.
Cooling a Hot Labor Market
Why has the system proven so resilient? The key variable in developed economies is the labor market. Employment growth remains strong, unemployment remains low (Display) and wage growth has kept pace with inflation in most major economies. This has allowed households to manage their way through challenging times and smoothed out the bumps in the business cycle.
