Global Economics Intelligence executive summary, October 2022


Growth rebounds in the United States and China; eurozone inflation reaches new heights as tightening continues; energy, climate reports paint a sober picture.

The world’s two largest economies exceeded growth expectations in the third quarter of the year. The US economy rebounded to a GDP growth rate of 1.8% year over year, after two quarters of contraction. The US growth was supported largely by consumption and exports. China’s economy expanded at a rate of 3.9% in the third quarter, a significant acceleration since the sluggish performance in the previous quarter. The slow second-quarter growth pace of 0.4% in China was widely viewed as a result of COVID-19 restrictions. Global forecasting institutions, such as the International Monetary Fund, the World Bank, and the OECD, as well as central banks, are trimming growth estimates to align with high inflation and slowing economic activity. Supporting data are beginning to arrive. In September, the OECD global and individual consumer confidence indicators flattened but at historically low levels. The composite leading indicators of the OECD point to a slowdown globally and in most individual economies. Most clearly, the Eurocoin, a forward indicator of the eurozone economy, dived into negative territory in September for the first time in two years, falling to −0.73 (+0.23 in August).

Monthly retail sales data are mixed (expanding in China; decelerating in the United States and the eurozone), but clearer signs of a slowing economy can be found further upstream. The global purchasing managers’ index (PMI) for manufacturing dropped into contraction (49.8) while the global services PMI remained flat at 50. Among surveyed economies, manufacturing PMIs point mostly to moderate expansion, but contractions are indicated in the eurozone and China. The individual services PMIs generally show contraction or slower growth.

Trade data form a lagging category, but the latest look back is positive. The CPB World Trade Monitor measured trade growth of 0.7% in August (versus no growth in July), with improved trade in developed economies. Individually, surveyed economies mostly report higher trade values than in the previous 12 months, with mixed inflation-adjusted results in recent months. The latest release of the Container Throughput Index measures a new historic high at 126.8 in September (August’s previous record reading was revised downward). A slight volume decrease was recorded in Northern European ports after an expansion in August. Chinese ports continue to recover from past slowdowns relating to COVID-19 restrictions.

The Global Supply Chain Pressure Index kept by the New York Federal Reserve continues to show subsiding congestion, though the reading is still elevated. Sea freight rates also remain high worldwide: more than triple the prepandemic level in China and India and about double in Western ports.

Unemployment rates have been mostly stable in recent months and remain relatively low in surveyed economies: 3.5% in the United States, 6.6% in the eurozone (a record low), 6.4% in India, and 8.7% in Brazil.

In the United States, consumer inflation was 8.2% in September, moderating slightly from 8.3% in August. Producer-price inflation also fell, to 11.5% (from 8.7% in August). In the eurozone, where energy prices are still very high, consumer and producer-price inflation set new records. Consumer inflation reached 10.7% in October (9.9% in September) and producer inflation hit a production-stopping 43.3% in August (the latest data) (Exhibit 1). In developing economies, inflation mainly eased, except for consumer inflation in India, which accelerated to 7.4%.

The prices of most commodities declined in October. The gold price, for example, has resumed a downward trajectory after briefly rising in October. The FAO Food Price Index remains elevated but declined in September, with a drop in food oil prices. Although energy prices have lately come down from ultrahigh levels, prices are still very high—crude petroleum (Brent) is at about $95 per barrel and the natural gas futures (Dutch TTF, December 2022) were at €123 per megawatt-hour on November 1—more than 20 times the last prepandemic level and more than twice the level from before Russia’s invasion of Ukraine (Exhibit 2).

Inflation expectations, as implied in the yield spread of US Treasury products, have been moving down, however, closing in on central bank targets: the most recent five-year forward rate published by the St. Louis Federal Reserve (October 27) is 2.33% (Exhibit 3).

Equity markets lost some value in October—but the losses were smaller than they were in September. The volatility index for equities (VIX) spiked in recent weeks; indexes for other assets were stable. The US dollar continued to gather strength in October, appreciating an average of 2.8% against other currencies.

In a continuing effort to bring inflation down to its target of 2%, the US Federal Reserve announced a fourth consecutive 75-basis-point interest rate hike after its November meeting. The move takes the policy interest rate to a range of 3.75 to 4%. The Fed’s own projections estimate that further hikes will push the policy rate to an upper limit of 4.5 to 4.75% in 2023. The European Central Bank also implemented a 75-basis-point hike, the second in a row, at its October meeting, which put policy rates to a range of 1.5 to 2.25%. The Bank of England did the same on November 3, raising the policy interest rate to 3%. The hike of 75 basis points, the largest since 1989, is a response to high inflation, measured at 10.1% in September. The yields of government bonds, meanwhile, continue to climb as a consequence of rising interest rates (Exhibit 4).Likewise, in the United States, the average 30-year fixed mortgage rate climbed above 7% for the first time in 20 years.

The dimensions of two crises

Two recent reports, on energy and climate, paint a sober picture of a natural and built environment in crisis amid months of punishing climate events and geopolitical disruptions.

The International Energy Agency (IEA) released World Energy Outlook 2022, warning that the world is facing its first-ever global energy crisis. According to the report, the crisis has several causes and was touched off by Russia’s invasion of Ukraine. It is stoking inflation, challenging climate commitments, and causing those governments that can afford it to spend billions to soften the impact of soaring energy costs on their societies. The report emphasizes that the burden of this crisis will fall disproportionately on poorer populations and societies and that the response globally must go far beyond short-term measures, toward diversifying supply and accelerating the transition to a green-energy economy.

In a parallel message, UN Secretary-General António Guterres reported that under today’s policies the world will experience a rise in average temperatures of 2.8°C (5°F) by the end of the century—a «global catastrophe.» He invited participants in November’s COP27 climate conference in Egypt to move very rapidly to meet commitments made in the Paris Agreement of 2015. The latest UN emissions gap report, he said, makes clear recommendations: «end our reliance on fossil fuels; avoid a lock-in of new fossil-fuel infrastructure; and invest massively in renewables.»

Noteworthy from the full Global Economics Intelligence release for October 2022 (with updated data)

United States. The economy rebounds in the third quarter; consumption and trade remain strong, while forward industrial indicators signal the strains of inflation. The US Federal Reserve hikes policy rate to 3.75–4%.

The US economy grew 1.8% year over year in the third quarter of 2022, after two quarters of contraction (—1.6% and —0.6% in the first and second quarters, respectively). GDP values increased 0.6% to $25.66 trillion (2.6% annualized growth) according to the advance estimate of the US Bureau of Economic Analysis. Much of the growth came from increased exports, including energy exports. The full-year GDP growth forecasts by the US Federal Reserve estimate 0.2% expansion in 2022, 1% in 2023, and 1.7% in 2024. (These are the September 2022 estimates which are downward revisions of the June estimates.)

The Fed has responded to high inflation, its main concern, with four consecutive interest rate increases of 75 basis points. The latest, announced by the Fed at its November meeting, brings the federal funds rate to 3.75–4%. In an October report, the UN Conference on Trade and Development warned the Fed that its tightening policy (and the strengthening dollar) will cause the most pain in the developing world. Imports are becoming more expensive, and public and private debt levels, already at dangerous heights, will rise further, according to the report.

At home, higher interest rates are affecting the housing market. At the end of October, the average 30-year fixed-rate mortgage climbed above 7% for the first time in 20 years; the rate will climb again should the Fed announce another interest rate hike. Home prices, meanwhile, have fallen for three straight months, in July, August, and September, though the latest median sale price ($404,000) is still higher than year-ago levels.

The US employment picture remains robust, with the unemployment rate falling to 3.5% in September (3.7% in August). Payroll employment increased by 263,000 jobs in September, though the labor force participation rate slightly decreased to 62.3%, a level 1.1% below the last prepandemic reading (February 2020).

Retail sales totaled $684 billion in September, about equal to last month’s total but 8.2% above the level in September 2021. The consumer confidence index (Conference Board) increased to 108.0 in September (103.6 in August), the second consecutive monthly increase.

In August, US export values remained very high, at $258.9 billion, though the total was $0.7 billion less than July’s historic high. Imports decreased by a wider margin, totaling $326.3 billion ($330 billion in July), mainly as a result of less imported crude oil.

From recent highs in mid-August, the Dow Jones and S&P 500 indexes lost about 16% of their value by September 30. The indexes partly recovered in October, gaining back about half the losses by October 26.

Eurozone. Eurozone GDP growth slows in the third quarter; European countries seek alternative-energy supplies, mount relief packages to soften the impact of energy costs; the European Central Bank (ECB) again raises interest rates; inflation reaches 10.7%. The eurozone economy expanded 2.1% year over year in the third quarter of 2022 (0.2% quarter over quarter). This is the weakest GDP growth in the eurozone since the second quarter of 2021. Early indicators, especially rising inflation, are pointing toward a contraction in the final quarter of the year.

Europe has seen some relief from high energy prices. Petroleum prices declined globally as Chinese demand sagged; natural gas prices in Europe continue to descend from ultrahigh spikes felt in August, as reserves accumulate and buying slows. The Brent crude price is still high, at $95 (October 31), and gas prices, at €123 per megawatt-hour (Dutch TTF gas futures), are still many times higher than they were two years ago.

The dimensions of the energy challenge in Europe have come into better focus, as European governments implement plans to soften the impact on consumers of high prices—at an estimated cost so far of €700 billion. The German plan is the largest, at €200 billion, financed with borrowing under the auspices of the pandemic-era economic stabilization fund. Households and businesses will receive basic volumes of gas and electricity at controlled prices. Energy providers will be compensated by the state, and market rates will apply to usage above allotted volumes.

Inflation is setting record highs. Consumer inflation reached 10.7% in October (9.9% in September), while the value of the euro, now at parity with the dollar, dropped to a 20-year low. The recent fall of energy prices did not affect the October inflation composition, as energy accounted for an even higher share than in the previous month (41.9% versus 40.7% in September). Food prices also exerted considerable upward pressure. Core inflation (minus energy and food) was 5%, also a historic high. In August (based on the latest available data), producer-price inflation shot up to 43.3% (38% in July), an industry-crippling level.

In its September projections, the ECB estimates that eurozone annual GDP growth will be 3.1% in 2022, slowing to 0.9% in 2023 and partly rebounding in 2024 to 1.9%. The challenges cited are the negative economic consequences of Russia’s invasion of Ukraine and distortions caused by the pandemic. The ECB especially highlighted losses in real income and a deterioration in confidence leading to economic stagnation in the second half of 2022.

With inflation persisting far above its 2% target, the ECB raised its policy interest rates 75 basis points in October, to 2% for the main refinancing rate, 2.25% for the marginal lending facility, and 1.5% for the deposit facility. The rate hikes this month and last were the highest in eurozone history.

The purchasing managers’ index (PMI) for manufacturing fell to 46.6 in October (48.4 in September, 49.6 in August). The fourth straight contractionary reading was the lowest in 29 months, pushed down by high energy prices and a sharp drop in new orders. The services PMI declined to 48.2 in October (48.8 in September, 49.8 in August). The indicator has measured a modest pace of contraction in services activity for three straight months but has fallen steeply from an annual high of 57.7 in April.

In August, the eurozone industrial production index edged up by 1.5% month over month and 2.5% year over year. The unemployment rate in the eurozone was steady at 6.6% in August compared with last month. The eurozone experienced another record trade deficit in August totaling €50.9 billion. While exports values are relatively high, having increased 24% year over year in August, to €231.1 billion, import values have soared in recent months, reaching far above the trend line, due to high energy costs. In August, imports increased 53% year over year, to €282.1 billion (€269 billion in July).

European equities improved slightly after reaching this year’s low on September 30; the Stoxx Europe 600 index is about 18% below its January high for the year. While the Italian—German ten-year bond spread stabilized at 2.4%, both rates went up—from 4.1 to 4.7% and from 1.8 to 2.3%, respectively.

Giorgia Meloni became Italy’s new prime minister. She is the leader of the far-right Brothers of Italy party, which received the most votes (26%) in a low-turnout election. Her governing coalition will include the anti-immigrant Lega party and Forza Italia, Silvio Berlusconi’s party.

China. Third-quarter growth exceeds expectations at 3.9%, led by industrial output; high-quality development set as the top priority during the 20th National Congress of the Chinese Communist Party (CPC).

China’s GDP growth rate in the third quarter of 2022 was 3.9% year on year (0.4% in Q2). Year-to-date GDP has grown 3.0% (2.5% in Q2) compared with last year. The agriculture, industry, and service sectors expanded 3.4%, 5.2%, and 3.2%, respectively.

Fixed-asset investment growth accelerated to 5.6% year over year in the third quarter (4.5% in Q2). By sectors, manufacturing investment expanded faster at 9.7% (8.1% in Q2); infrastructure investment growth accelerated to 11.2% in the third quarter (6.4% in Q2).

However, the contraction in real estate investment deepened, falling —14.9% in the third quarter (−7.7% in Q2).

Residential property activity continued to retreat in the third quarter. Both sales revenue and floor space sold contracted —21.3% and —23.8% year over year, respectively (−36.2% and −32.1% in Q2). The average housing price rose 3.3% in the third quarter, a sign of some recovery in demand (−6.1% in Q2).

Since August, to stabilize the housing market, some local governments and state-owned enterprises have been repurchasing (or intend to repurchase) residential housing developments in lower-tier cities. Most of the repurchased properties would be used for affordable housing, including rental and resettlement housing.

Inflation rose slightly in September, to 2.8% (2.5% in August). The reason for the rise was higher food prices. Food inflation was 8.8% (6.1% in August), as pork prices increased again despite government efforts to increase supply. Producer-price inflation declined again, dipping to 0.9% (2.3% in August) amid COVID-19 controls and lower petroleum prices.

New social financing expanded 21.6% year over year in September, to RMB 3.5 trillion (−18.6% in August, or RMB 2.4 trillion). All social financing totaled RMB 340.7 trillion in September, an expansion of 10.6% (10.5% in August).

Cross-border trade expanded 5.8% year over year in the third quarter (8.1% in Q2). Export growth increased 10.0% (12.8% in Q2) while imports improved slightly, with 0.6% growth (2.4% in Q2).

The 20th CPC Congress was held October 16–22. Themes for economic development were generally indicated in the opening address of President Xi Jinping. The major tasks include the promotion of «high-quality» economic development, the improvement of scientific and technological innovation, deepening the income distribution system in the direction of «common prosperity,» and accelerating the transition to green development.

India. Amid a global slowdown, the economy continues to expand, but inflationary headwinds hold back the pace. The central bank raises a key interest rate and scales back the growth forecast. Amid a global economic slowdown and high inflation, the Indian economy has performed well in recent months. The purchasing managers’ index (PMI) for manufacturing has shown healthy expansion for three months’ running, with a reading of 55.1 in September (56.2 in August). The services PMI also shows expansion at 54.3 but slowed more clearly from the August mark of 57.2. Inflation was behind the slowdown, most obviously reflected in slower hiring.

Inflation jumped to 7.4% in September (7% in August), with price increases in nearly every category except energy. While food prices increased at a rate of 8.6% in September (versus 7.6% in August), energy price growth slowed slightly, to 10.4% (from 10.8% in August). One positive sign is that producer-price inflation slowed for the fourth straight month, to 10.7% in September (12.4% in August). In view of the high inflation, the Reserve Bank of India raised the policy repo rate 50 basis points, to 5.9% while scaling back its GDP growth projection for fiscal 2023.

Industrial production in India moderately contracted in August (—0.8% year over year). The first retreat since February of last year was partly a result of decreased output of pharmaceuticals and other medicinal products. The manufacturing sector slowed −0.7% overall, while mining slowed —3.9% compared with last year’s levels. India’s trade deficit slightly improved in September, to $25.7 billion ($28 billion in August) but was still 14.4% above last year’s level. Export values increased to $35.5 billion ($33.9 billion in August), while imports decreased slightly, to $61.2 billion ($61.9 billion in August).

The stock markets (BSE and NSE) lost between 5% and 7% of value in September before recovering most of the losses in October. The unemployment rate declined to 6.4% in September, after reaching 8.3% in August, which was a one-year high. According to the Centre for Monitoring the Indian Economy, September’s unemployment rate is the lowest recorded in India since August 2018.

Central bank reserves decreased to $532.9 billion as of October 7, versus $550.9 billion on September 9. The rupee has fallen in value against the US dollar over the past 12 months, lately reaching 82.8, a historic low.

Brazil. Lula da Silva narrowly defeats Jair Bolsonaro in the presidential election; inflationary pressure recedes amid softer growth in manufacturing and services.

Luiz Inácio Lula da Silva, Brazil’s former president (2003–2010) and the leader of the leftist Workers’ Party, narrowly defeated far-right incumbent president Jair Bolsonaro in the presidential runoff election. In the officially certified results, Lula received 50.9% of the vote, or 2.1 million more votes than Bolsonaro, out of 118.6 million recorded. While Bolsonaro has not conceded the election (which he long suggested was fraud ridden), several important Bolsonaro allies (including the speaker of the Chamber of Deputies) have publicly recognized Lula as the winner. The incoming president will take office on January 1, 2023. He has promised to revive policies from his previous time in office, including poverty eradication, promotion of worker and indigenous rights, and restoration of Amazon protections.

Inflationary pressures receded in September, with consumer inflation slowing to 7.2% (8.7% in August). This was the third straight monthly decline in inflation and the lowest reading since April 2021. Transport and food costs have gone down in Brazil; the prices of fuel and electricity were lower, as the state-run energy company Petrobras cut oil and gas prices. Producer-price inflation also fell in the last reading, to 12.2% in August (17.9% in July). The August producer-price inflation figure is the lowest mark since June 2020. Domestic vehicle sales totaled 143,000 units in September (155,000 in August). The unemployment rate decreased to 8.9% in September (three-month moving average; 9.1% in August). The reading is the lowest since 2015.

While indicators have improved in Brazil, the global slowdown and inflationary headwinds challenge recovery. In August, the industrial production index retreated −0.6% month over month (+0.6% in July). The purchasing managers’ index (PMI) for manufacturing slowed to 51.1 in September (51.9 in August)—still expansionary but the lowest reading since February. New orders rose only marginally, and new export orders retreated, revealing weaker global demand. Input costs rose more slowly, however, which helps ease prices. The services PMI also slowed, to 51.9 in September (53.9 in August), as new business growth moderated.

In September, exports and imports were still high, though the totals retreated a little from last month’s inflation-fueled historic highs. Exports totaled $29 billion ($30.8 billion in August); imports reached $25 billion ($26.7 billion in August). The surplus was $4 billion ($4.1 billion in August).


McKinsey & Company is an American worldwide management consulting firm, founded in 1926 by University of Chicago professor James O. McKinsey, that advises on strategic management to corporations, governments, and other organizations.

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