The global economy continues to rebalance as reflected in
the February Market Purchasing Manager Index (PMI) surveys
(Chart 1). The PMIs show a strong improvement in services, while manufacturing remains in contraction. This is good news, because the excessive goods spending created by pandemic lockdowns and stimulus is unwinding as spending on services recovers.

This should allow inflation to fall and protect growth, and it is
consistent with our cautiously optimistic view that growth this
year will not be terrible thanks to high consumer savings levels and
pent-up demand. January’s market moves discounted much of the good news, however, and stronger growth will sow the seeds for higher US inflation, which could lead to a recession in the US on the back of higher rates.

After January’s euphoric performance, February markets digested the moves and contemplated the array of risks faced by the global economy despite more stable demand. Through February, we continued to monitor three key global macro risks. The first was
the prospect of US inflation staying higher for longer, forcing
the US Federal Reserve (Fed) to push the economy into a deep
recession; the second was the expanding impact of the Russia/
Ukraine war on global markets via energy costs; and the third
was the lapse of judgement that sparked a geopolitical incident
between China and the US.