Global Economy Gets Boost but Inflation Worries Linger

April 25, 2023

Global Economy Gets Boost but Inflation Worries Linger

US and European business activity rose in April at the fastest pace in over a year, a boost for the global economy but a potentially complicating factor for the central banks working tirelessly to reduce high inflation.

Demand for services drove the growth, according to surveys by data firm S&P Global covering the US, eurozone and UK businesses. That kept pressure on price increases in regions where inflation last year reached its highest level in decades.

Central banks on both sides of the Atlantic have indicated they intend to continue raising interest rates until inflation moves lower.

U.S. inflation eased to 5% in March, its lowest annual rate in nearly two years but still well above the Federal Reserve’s 2% target. Federal officials have said they have a troubled road ahead to bring down inflation, suggesting another interest-rate increase would be warranted at the latest meeting in two weeks despite the increased risk of a recession.

The surveys of purchasing managers indicated both manufacturing and services output accelerated in April across the US. Job growth picked up, and average prices charged for goods and services rose at the fastest pace since September.

Economists estimate the US economy grew at a 3.3% annual rate in the first quarter with the Commerce Department set to release its estimate of US gross domestic product at the end of this week. While the US economy has proven more resilient this year, most economists expect stubborn inflation and high interest rates will lead to a recession in the next 12 months.

Europe’s economy also kept growing in April, the latest surveys indicated, suggesting the European Central Bank is on course to raise its key interest rate in May. The Bank of England is also expected to raise its key rate for the U.K. later that month.

Eurozone inflation stands at more than three times its target, and U.K. inflation remained in the double digits in March.

With energy prices falling after a milder-than-usual winter, the eurozone economy appears to have rebounded in 2023, boosted by a rise in household spending and higher factory output.

Pound rallies against the dollar to become the strongest currency in the G10

Sterling has bounced back against the dollar to become the strongest currency among the G10 group of major economies.

The pound has rallied against the dollar to become the best performing currency of the G10 group of economies. Sterling rose to 1.25 against the dollar this week after hitting the same point for the first time since June 2022.

It comes after the value of the pound dropped dramatically in the wake of former Chancellor Kwasi Kwarteng's "mini-Budget", which heavily disrupted the markets with its historic tax cuts funded by a huge increase in borrowing.

The pound tumbled against a range of currencies in the aftermath and flirted with parity against the dollar as investors lost confidence in the UK.

The pound took a substantial hit last year with the growing concerns of high inflation, stagnation fears, and poor economic forecasts. 

Alongside this, the reliance on overseas energy and political disruption only further contributed to the drop in value.

The euro has also been lifted by these dynamics, rising 2.3% against the US dollar in 2023. The pound’s rally has been sharper in large part because its 2022 declines were more severe.

Both currencies have been aided by the greenback’s sharp drop from highs reached last September as recession fears have continued to take hold across the US.

A lack of clarity around the Federal Reserve’s next steps has also restrained the dollar in recent weeks. Investor speculation has increased that the Federal Bank could pause or stop rate hikes due to concerns about the economy following the failure of Silicon Valley Bank last month.

All Insight Articles >Contact Us >

Latest Insight