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Inflation: Not Vanquished Yet

A recent report from Citi Research’s Nathan Sheets, finds pockets of positivity in the global economy, against a backdrop of a continuing battle with inflation.

The health of the global economy continues to offer food for thought.  

The growth outlook in China is stronger and less uncertain than Citi analysts envisioned a few months ago. And the euro area, rather than a full-on contraction, is seeing something more like stagnation. Recent data from the US also suggests resilience.

That said, the global campaign against inflation still has a long way to go. Specifically, consumer spending on services—and the resultant tight labor markets and services inflation—have momentum.


Global Growth Forecasts

Figure 1. Global Growth Forecasts Source: Citi Research If you are visually impaired and would like to speak to a Citi representative regarding the details of the graphics in this document, please call USA 1-888-800-5008 (TTY: 711), from outside the US +1-210-677-3788.

Source: Citi Research
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Citi Research economists now see a “less hard” landing for the global economy. They see global growth slowing this year to a below-trend 2.2% pace, from 3% in 2022. This projection is up more than 0.25 of a percentage point from late last year. Even with that upgrade, global growth would remain in the bottom quartile of performance during the past forty years, for context.

Next year, Citi Research economists see overall growth rising to 2.6% as the global economy bounces back, albeit slowly. And they recently marked down their probability of a synchronized global recession to 30%. But they still project “rolling” country-level recessions and weakness through the year ahead.

Specifically, outright recessions are expected in the United States, Canada, Mexico, Brazil, Chile, Germany, Italy, the United Kingdom, Korea, and Russia.

But the timing and trajectory of these downturns is likely to vary.

In China, the re-opening from Covid is proceeding full steam ahead. The data indicate strong household spending through Chinese New Year. For example, despite the public health challenges that prevailed, movie ticket sales exceeded levels posted both last year and in 2019.

In the US, recent data have generally pointed to economic resilience. The January payrolls report showed booming job creation of 517,000; the unemployment rate fell to 3.4%.

In the Euro area, gas prices have fallen from peaks six months ago, and measures of economic sentiment are climbing back. Fourth-quarter real GDP growth came in at 0.4% (annualized). Germany, in contrast, saw a mild contraction. Accordingly, growth this year is poised to run at 1%, up from our forecast of -0.4% at the end of last year.


Central banks—Focused on Subduing Inflation 

DM central banks are in the midst of a vigorous tightening cycle. The Federal Reserve over the past year has lifted rates by 450 basis points. Going forward, Citi expects 25 basis point rate increases at each of the Fed’s next three meetings.  

Similarly, Citi Research expects the ECB to push the deposit rate to 3½%, its highest setting in two decades, and sees it holding that well into 2024, until inflation is clearly on its way back to the 2% target. In the UK, Australia, and Canada, policy has also tightened appreciably—and is likely to remain tight.

The Bank of Japan remains an important outlier among the DM central banks, with its policy rate still in negative territory.

For the EM economies, policy is historically tight among many in Latin America and some in emerging Europe. These central banks began their hiking cycles in 2021 and have remained aggressive, as they have faced domestic as well as global price pressures.

In contrast, central banks in emerging Asia have been less vigorous, as domestic inflation has been more muted.  

As DM central banks eventually pause their tightening, and global inflationary pressures ebb, the EM central banks where policy is particularly tight should have scope for rate cuts. For more information on this subject, please see Global Economic Outlook & Strategy - Inflation Is Not Yet Defeated (21 Feb ’23)


Citi Global Insights (CGI) is Citi’s premier non-independent thought leadership curation. It is not investment research; however, it may contain thematic content previously expressed in an Independent Research report. For the full CGI disclosure, click here.


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