As central banks attempt to reduce inflation with higher interest rates, not all corners of the economy are cooling down as intended. In manufacturing, output is indeed subdued outside China, but global indicators point to general acceleration in the services economy. In the United States, positive retail sales totals and outsize jobs growth suggest a stronger business environment in early 2023. In China, the purchasing managers’ index (PMI) for manufacturing, a key leading indicator, reached 52.6 in February, the highest reading in more than a decade. The nonmanufacturing PMI for China rose to 56.3 on higher services and construction activity in an economy awakening from the “zero-COVID” closures. In the eurozone, services growth pushed the composite PMI (for manufacturing and services) above the expansion line of 50 with a reading of 50.3 in January; the indicator then advanced to 52.6 in February, the highest mark recorded since May 2022 (Exhibit 1).
While some economic data run counter to predictions of recession made at the end of 2022, stop-and-go financial markets and corporate belt-tightening attest to CEO and investor uncertainty. The caution comes from still-high consumer- and producer-price inflation. For consumers, energy and food prices were the principal inflation drivers to begin with, but core inflation rates have since climbed as well. Central banks, meanwhile, keep raising policy interest rates: at February meetings, the US Federal Reserve raised its rate to 4.5–4.75%, the European Central Bank to 2.5–3.0%, the Bank of England to 4.0%, and the Reserve Bank of India to 6.5%. Further hikes in 2023 are expected for many of these economies. In Brazil, where the policy rate of 13.75% is one of the highest in the world, President Lula da Silva has sharply criticized the central bank’s course as a major drag on economic prosperity (Exhibit 2).
A disinflationary process has been observed in many economies, as prices still rise but at a slower rate. Yet today’s inflationary dynamics are stubborn things. In India, inflation receded in monthly steps from 7.4% in September 2022 to 5.7% in December. In January 2023, however, inflation came back, rising to 6.5% on higher prices for cereals (+16.1%) and spices (+21.1%). In the eurozone, a similar pattern is emerging: inflation accelerated in February in Germany (9.3%), France (7.2%), and Spain (6.1%), as the energy price shock from last year continues to filter through to the cost of goods and services. Rather than slowing, core inflation ticked up, to 5.6% (from 5.3% in January). European Central Bank president Christine Lagarde stated that an interest rate hike of 50 basis points is “very likely” in March. In the United States, meanwhile, where the inflation rate has descended from 9.1% in June 2022 to 6.4% in January 2023, core inflation also went the other way in January, bouncing up to 4.6% from 4.3% in December 2022. Questions on the minds of most US and eurozone economists and policy makers are whether the central banks can reach inflation targets of 2% without triggering a recession and whether doing that would be worth the economic cost (Exhibit 3).
In other recent data, global and individual consumer confidence indicators did not generally worsen in January but remained stable at a low level. Retail sales retained positive momentum in the United States and the United Kingdom in January; in older data, sales retreated in the European Union and China in December.
The global PMIs for both manufacturing and services measured mild contraction in January at 49.1, improving in February to 50.0. Also in February, individual manufacturing PMIs show improvement across surveyed economies. While mild contraction persists in developed economies, China’s manufacturing engines returned to expansion territory. Individual services PMIs, meanwhile, are almost uniformly in expansion, especially strengthening in China and the developed economies.
Overall in 2022, world trade expanded 3.2%. At the end of the year and into 2023, however, trade volumes slumped. In December, volumes decreased –0.9% (–1.7% in November); notably, exports from China and the United States decreased. In January, the Container Throughput Index decreased to 120.2 (from 124.4 in December) as traffic declined in northern European ports. After a slight uptick in December, the Global Supply Chain Pressure Index returned to its easing course in January 2023.
Unemployment rates remain relatively low in all surveyed economies: 3.4% in the United States, 6.7% in the eurozone, 3.7% in the United Kingdom, and 7.9% in Brazil. In a clear sign of economic momentum, the US economy added 517,000 new jobs in January, the highest total in more than a year.
In the developed economies, inflation is slowly easing but it is still high enough to push consumption levels lower and keep interest rates elevated. In emerging economies, disinflation is proceeding more rapidly, especially for producer prices.
The Brent crude price, now at $86 per barrel (March 6), is about where it was at the beginning of the year. With significant stockpiles of natural gas and a mild winter, Europe has benefitted from a three-months’-long decline in natural gas prices. At €42 per MWh on March 6, prices are still more than twice their level on the same day in 2021. Food price inflation has slowed but prices of key foodstuffs in some locales remain as much as 30% or 40% above prewar or prepandemic norms (Exhibit 4).
Inflation expectations implied in the yield spreads of US Treasuries remain in the range of 2.3% to 2.5%. Equity indexes in the developed economies—especially Europe—have been gradually recovering in the new year. The US dollar strengthened in February, against the euro ($1.07), the pound ($1.20), and the yuan (6.87 renminbi). The equities volatility index remains elevated in comparison with prepandemic levels. Yields on long-term government bonds eased in February.
McKinsey’s Global Economics Intelligence (GEI) provides macroeconomic data and analysis of the world economy. Each monthly release includes an executive summary on global critical trends and risks, as well as focused insights on the latest national and regional developments. View the full report for February 2023 here (individual reports) and here (global report). The reports are available for free to email subscribers and through the McKinsey Insights app. To add a name to our subscriber list, click here. GEI is a joint project of McKinsey’s Strategy & Corporate Finance Practice and the McKinsey Global Institute.