Global Economics Intelligence executive summary, September 2022

Central banks sustain aggressive policy tightening; industrial activity picks up in emerging economies; financial-markets uncertainty works to strengthen the dollar.

Led by the US Federal Reserve, most central banks are now following a tightening course, increasing interest rates to fight inflation. With 75-basis-point hikes in September, the Fed and the European Central Bank (ECB) brought policy interest rates to ranges of 3–3.25% and 0.75–1.50%, respectively. Fed officials expect these rates to exceed 4% in 2023. For the ECB, the September hike was the largest in its history. ECB president Christine Lagarde and members of the ECB rate-setting council have signaled strongly that further hikes can be expected in the remaining two meetings of the year (Exhibit 1).

Led by the US Federal Reserve, most central banks are following a tightening course, increasing interest rates to fight inflation.
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The policy makers have repeatedly stated that they are determined to bring down inflation, which was 8.3% in the United States in August and reached 10% in the eurozone in September (Exhibit 2). Business leaders share the concern, as suggested by the results of McKinsey’s latest global survey on economic conditions. Respondents from most regions cited inflation as the main risk to their home economies.

Consumer and producer price inflation began to soften in the United States in August, but the pace is still increasing in the eurozone.
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This battle against inflation, and the resulting change in policy direction, is fueling uncertainty in a crisis-weary global economy. Financial markets reacted quickly to interest-rate rises. Volatility indexes of traded assets uniformly increased, and most equity markets declined. Government bond yields climbed, and wary investors shifted wealth to dollar-denominated assets. The US dollar strengthened to historic levels against the pound and the euro. In Britain, where inflation is near 10%, the Bank of England (BoE) raised its key interest rate to 2.25%. The vulnerability of large economies to any additional shock was then starkly demonstrated as news of a government plan for tax cuts and borrowing set off turmoil in the UK bond market. The depreciation of the pound accelerated and the BoE announced that it would buy ₤65 billion in government bonds to secure financial stability.

Among the factors driving high inflation are high energy costs. The price of petroleum has been receding since June—the Brent price was around $90 per barrel by the end of September. However, the prices for coal and natural gas have increased rapidly, especially in Europe (Exhibit 3).

Oil prices have lately declined while the prices for natural gas and coal continue to increase.
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European Union countries, all with different levels of vulnerability, are separately seeking supplies to replace Russian energy products, as further bans on purchases will take hold in the coming months. Individual countries are also seeking to fund supports for business and consumer energy costs while exploring schemes to reduce consumption. At the EU level, European Commission president Ursula von der Leyen recently floated a proposal for a windfall tax on oil and gas producers.

In the recent economic data, more bright spots are present in emerging economies, though consumer confidence indicators remain almost uniformly pessimistic. The OECD consumer confidence surveys for August did not show a decline, but results remain at or near the lowest-ever levels. Retail sales levels continue to rise, at least nominally, but in the high-inflation environment, real consumption may be declining.

The global purchasing managers’ indexes (PMIs) show slight contraction in the services sector in August and September and slight expansion in manufacturing. Among surveyed economies, India’s manufacturing PMI continues to show fast expansion at 55.1 in September, but the PMIs in most surveyed economies pointed to slower growth or contraction in August and September. In the emerging economies, services sectors are expanding, but in the United States and eurozone, the indicator fell below the contraction line.

Trade data, which are lagging measures, were generally stable in July; signs of improvement returned in August. The CPB World Trade Monitor measured an increase in trade volumes of 0.7% in July (–0.6% in June) as momentum improved in advanced economies. Among individual surveyed economies in August, exports declined in the eurozone, China, and India; imports were generally lower, except in Brazil. However, the Container Throughput Index for August reached 127.4 (flash estimate), an advance over July’s historic high of 126.5, as throughput in Chinese ports continued to recover. Throughput in northern European ports, which had been declining, strongly increased in August, to 115.2 (111.5 in July) (Exhibit 4).

The Container Throughput Index reached a historic high of 127.4 in August, from 126.5 in July, suggesting a modest trade recovery.
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The Supply Chain Pressure Index kept by the New York Federal Reserve shows easing pressures as demand softens and freight capacity improves. Sea freight rates came down as well but remain historically high, especially in Asia, as the effects of the pandemic on demand and supply continue to reverberate.

In developed economies, the unemployment rate remained relatively low in August, with readings of 6.6% in the eurozone (the historic low) and 3.7% in the United States. The latest data for emerging economies show declining unemployment in China (5.3%) and Brazil (8.9%). In India, the unemployment rate climbed to 8.3% in August but retreated to 6.4% in September.

The softening of inflation in August in most surveyed economies (except the eurozone) is confirmed by recent price data. The prices for most traded commodities declined in September; exceptions were agricultural prices, which increased overall, and energy prices, which remain volatile. Food prices, another significant driver of inflation, have also declined lately, as indicated by price declines in most components of the FAO food price index (Exhibit 5).

Food prices have lately declined, as indicated by declines in most components of the FAO food price index.
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Interest rates, energy uncertainty, and developments in the Chinese property market: Noteworthy from the full Global Economics Intelligence release for September 2022 (with updated data)

United States: As the US Federal Reserve makes a third steep interest-rate hike, financial markets retreat and warning signs appear in industry indicators.

The US Federal Reserve implemented a third consecutive 0.75 percentage-point increase in its benchmark interest rate, bringing it to a range of 3% to 3.25%. After the announcement, Fed chair Jerome Powell suggested that the Fed intends to bring inflation under control even at the price of a recession. No recession is foreseen in the Fed’s latest economic projections, however, but a hiring slowdown is expected, along with a rise in the unemployment rate to 4.4% in 2023. More interest-rate hikes are also expected. Projections of the Federal Open Market Committee members put the policy rate at 4.4% by the end of 2022 and to peak at 4.6% in 2023.

The consumer price index remains very high but has fallen for two straight months, landing at 8.3% in August (8.5% in July; 9.1% in June). Much of the drop was due to a fall in the energy price index, to 23.8% from 32.9% in July, as gasoline prices cooled. Notable is that core inflation (excluding energy and food prices) increased to 6.3% (5.9% in July). The NY Fed Survey of Consumer Expectations shows inflation expectations falling in August to 5.7% (one year ahead) and 2.8% (three years ahead) from 6.2% and 3.2%, respectively, in July.

US home mortgage rates have climbed, with the average 30-year fixed rate reaching 7.06% on October 3. The trend followed the US inflation rate and has accelerated with the Fed’s tightening regimen. US home sales have declined in 2022, while prices remained high. Sales of existing homes numbered 4.8 million in August, well below January’s mark of 6.5 million.

The consumer confidence index (Conference Board) improved to 103.2 in August (95.3 in July), following three consecutive monthly declines. Retail and food service sales totaled $683.3 billion in August, an increase of 0.3% (month-over-month).

In July, US exports set another record high at $259.3 billion, a slight improvement ($0.5 billion) over June’s total. Exports of goods declined slightly, on lower energy prices. US imports declined 2.9% in July, to $329.9 billion ($340.4 billion in June), with consumer goods declining the most.

US equity indexes are reflecting investor fears of a recession. Since mid-August, the Dow Jones and S&P 500 indexes lost around 12–13% of their value (as of October 5); on the year, the Dow is down 17.7% and the S&P is down 22%. The yield on two-year US Treasury notes exceeded 4% for the first time since 2007. The equities volatility index (VIX) has climbed in this period, approximately from 20 to 30.

The dollar strengthened against the euro and the British pound. On October 4, the exchange was $1.13 against the pound, one of the lowest ratios since 1985, and $0.99 against the euro, among the lowest since 2002 (shortly after the euro was introduced). The stronger dollar has been capturing a rising share of global payment flows, mainly at the expense of the euro.

Eurozone: With inflation historically high, the European Central Bank makes steep policy-rate hike; energy agony continues.

The European Central Bank (ECB) hiked its policy rate 75 basis points, the largest increase in its history. After the 50-basis-point hike in July, policy interest rates now range from 0.75% (deposit facility) to 1.5% (marginal lending facility). In remarks made after announcing the hike on September 8, ECB president Christine Lagarde said that the bank would continue raising rates “over the next several meetings” because “inflation remains far too high and is likely to stay above our target for an extended period.”

Consumer inflation was 10% in September (9.1% in August), the highest in eurozone history. Energy prices were the main driver, followed by food prices. Producer price inflation reached 37.9% in July, a new record. Most discouraging was a leap in energy costs of 97.2% for producers.

Energy price inflation was 40.8% in September (38.6% in August). Uncertainty of supply caused by Russia’s war in Ukraine and impending bans on Russian fuel caused natural gas prices to spike in Europe. The Nord Stream 1 pipeline had been providing Europe with some of its gas supply, but flow was restricted due to the war and it was operating at 20% capacity. A second pipeline, Nord Stream 2, was physically completed by Germany and Russia but operation was halted, also due to the war. On September 27, Swedish and Danish authorities revealed that both pipelines had been damaged and Nord Stream 1 was visibly leaking large amounts of gas into the Baltic Sea. Natural gas prices, which had begun to decline, jumped to new peaks.

A third-quarter slowdown is expected in the eurozone economy. Eurostat upwardly revised the eurozone’s real second-quarter GDP growth pace, to 0.8% (from 0.6%). This is further evidence that in the first half of the year, manufacturing and services benefited from an easing of supply bottlenecks and the lifting of pandemic-related restrictions. In the ECB’s latest projections, however, the growth pace is seen as falling to 0.1%, a reduction of 0.3 percentage points compared with the June estimate. The expected slowdown may worsen, however, since the projection was partly based on reduced natural gas supply from Nord Stream 1, a pipeline that as of now is unlikely to provide any supply at all in the foreseeable future. All three of the McKinsey–Oxford Economics latest scenarios on the eurozone economy show contraction in the third quarter of the year (Exhibit 6).

Economic scenarios plot potential impact of disruptions on the eurozone GDP growth path 2022–25.
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Disrupted energy supplies, superheated prices for gas and electricity, and increases in bank lending rates (holding back investment) will thus flatten growth in Europe, according to the ECB. The technical assumptions in the ECB projections include more stable oil prices, as supply outpaces demand and OPEC production nears prepandemic levels.

To replace Russian energy products, Germany has been attempting to secure more liquefied natural gas (LNG) from Gulf states (Qatar, Saudi Arabia, and the United Arab Emirates). Germany also announced that it would retain operations at two of its three remaining nuclear power plants until April 2023, to provide power if necessary this winter. Individual European countries have offered consumers and businesses an array of support programs to offset rising energy costs. The European Union is now weighing windfall profits levies on energy companies to subsidize consumers. Power rationing is also being discussed.

China: Despite COVID-19 restrictions, heat waves, and drought, Chinese economic activity showed some signs of recovery in August and September.

Consumer inflation ticked down to 2.5% in August (2.7% in July). Producer price inflation fell to 2.3% year-over-year in August, an 18-month low (4.2% in July). Most analysis ascribes the price slowdown to reduced demand resulting from COVID-19 restrictions, heat waves, and drought. If this is so, the data are not yet aligned, as retail sales growth was 5.4% in August (3.5% in July), the strongest growth in three straight months of expansion.

Growth of industrial value added improved to 4.2% year-over-year in August (3.8% in July). Utilities production accelerated to 13.6% (9.5% in July). Growth in manufacturing investment also improved, to 3.1% (2.7% in July). Mining-sector production grew more slowly in August, at 5.3% (8.1% in July).

The drought and heat wave in August were severe in China, with the most affected region, the Yangtze River basin, experiencing record-low water levels. Power supplies were also affected. The government induced rain to save crops, but the month-long disruption ended with much-needed rain lowering temperatures in the most affected areas.

Investment in fixed assets accelerated to 6.4% in August (3.6% in July, year-over-year). By sectors, manufacturing investment expanded faster, at 10.6% (7.5% in July); infrastructure investment growth accelerated to 14.2% in August (9.1% in July).

Real-estate investment, unsurprisingly, continued to retreat, contracting –12.6% year-over-year in August (–11.0% in July). Residential-property activity remained on a downward trajectory in August, though the rate of deceleration slowed. Sales revenue and floor space sold contracted −20.8% and −24.5%, respectively, in August (versus –28.6% and −30.3%, respectively, in July). The average housing price rose by 4.8% in August (2.4% in July).

Chinese authorities, including the Banking and Insurance Regulatory Commission (CBIRC), have made priorities of ending real-estate speculation and completing and occupying unfinished projects. In late August, authorities announced that they will issue 200 billion yuan in special loans to help real-estate developers finish stalled housing projects. Local authorities have also set up bailout funds: for example, the authorities in Zhengzhou, a provincial capital city with the most suspended housing projects, have set up a bailout fund worth ten billion yuan and instructed developers to restart all suspended projects before October 6.

Cross-border trade levels have been high in China from May to August, after pandemic restrictions disrupted trade earlier in the year. The pace of growth slowed in August, to 3.8% year-over-year (11.0% in July). Exports growth was 7.1% (18.0% in July) and imports growth was nearly flat at 0.3% (2.3% in July). The port of Shanghai recorded record export growth in August, suggesting it was free of pandemic restrictions.

India: The economy expanded 13.5% in the second quarter of 2022; industrial production slowed in July but more recent indicators show manufacturing and services growth.

India’s GDP grew at a pace of 13.5% year-over-year in the second quarter of 2022 (first quarter fiscal year 2023). The elevated result reflects a low-base effect and pent-up demand as the economy exits COVID-19 restrictions of the previous quarter.

In August, the purchasing managers’ index (PMI) for manufacturing continued to point to solid expansion at 56.2 (56.4 in July). Output, new orders, and export orders are showing the fastest expansion among subindexes. The readings of the services PMI are also strong, reaching 57.2 in August (55.5 in July); the services employment subindex rose at the fastest pace in 14 years.

On a monthly basis, trade volumes decreased in August; on an annual basis, exports increased marginally (1.6%) to $33.9 billion, while imports expanded by 37.3% to $61.9 billion. The trade deficit improved slightly, to $28 billion (versus $30 billion in July), mainly because the value of oil imports declined—India has been importing Russian oil at discounted prices. The August deficit is still among India’s highest ever, however, partly because of falling external demand in recent months. Existing shipments are still working their way through destination ports and warehouses as economies emerge from the pandemic and demand shifts from goods to services again.

Consumer price inflation increased to 7% in August (6.7% in July), mainly as a result of rising food prices. Core inflation (excluding energy and food) was unchanged at 6%. Wholesale price inflation eased to 12.4% (13.9% in July). The Reserve Bank of India’s (RBI) inflation target is 4% (with leeway on either side). The RBI’s policy interest rate (repo rate) is now 5.9%, after four hikes this year, the most recent made on September 30.

Brazil: The economy expands 1.2% in the second quarter; inflation slows in August; trade and the services sector expand; manufacturing slows and retail sales contract as consumers remain cautious.

Brazil’s GDP grew 1.2% in the second quarter (1.1% in the first quarter). The growth reflects a rebound in fixed investment, which expanded 4.8% quarter-over-quarter in the second quarter after retreating –3.0% in the first quarter. Private consumption also picked up, expanding 2.6% in the second quarter after 0.5% growth in the first quarter (seasonally adjusted).

Consumer inflation fell to 8.7% in August (10.1% in July; 11.9% in June), marking the first month since September 2021 in which inflation was not in double digits. The slower inflationary pace was the result of lower fuel and transport costs. Brazil’s central bank consequently refrained from hiking the policy rate (Selic), which nevertheless stands at 13.75%, the highest level since 2016.

With high inflation globally, Brazil measured strong exports growth in the second and third quarters; in August export values rose 8.4% year-over-year to $30.8 billion on increases in manufacturing and agricultural shipments ($30.0 billion in July). Imports burgeoned in the same period, reaching $26.7 billion in August ($24.5 billion in July). Both export and import totals establish new historic highs in August, but both totals declined in September.

The monthly average exchange rate for the real was BRL 5.14 per US dollar. In late September, the currency slipped against the strengthening dollar, reaching BRL 5.40.

In Brazil’s highly contested national elections, former president Lula da Silva won in the first-round presidential contest on October 2, with 48.4% of the vote against incumbent president Jair Bolsonaro’s 43.2% share. Since the challenger failed to win an absolute majority over the incumbent, a second, head-to-head round between the two candidates will be held on October 30.


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 September 2022 here and here. Detailed visualized data for the global economy, with focused reports on selected individual economies, are also provided as PDF downloads on McKinsey.com. 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.

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