Global Economics Intelligence executive summary, July 2023

According to the recent update from the IMF, the global growth rate is projected to decrease from 3.5% in 2022 to 3.0% in both 2023 and 2024. This forecast, although slightly higher than the previous prediction in April 2023, is still considered weak compared to historical standards. Furthermore, the IMF expects global headline inflation to decrease from 8.7% in 2022 to 6.8% in 2023 and 5.2% in 2024. However, it also predicts that underlying (core) inflation will decrease at a slower pace, with revised upward forecasts for 2024.

Consumer optimism has risen, but they still approach big purchases with caution (see Exhibit 2). In June, Brazil witnessed an uptick in consumer confidence, reaching 92.3 (up from 88.2 in May), marking the highest level since February 2019. Nevertheless, many countries experienced a decline in consumer expenditure when compared to the same period last year, with China witnessing a notable slowdown in consumption.

Central banks have successfully maintained a stable level of inflation anticipation. In advanced nations, inflation is slowing down due to a decrease in producer prices. Though there has been a slight increase in inflation rates in Russia and India, it still remains relatively low. Nevertheless, individuals are closely monitoring the inflation situation in Russia.

In the recent news, the Federal Reserve decided to raise the interest rate paid on reserve balances to 5.4%. Additionally, they also increased the federal funds rate, setting a target range of 5.25% to 5.5%. Interestingly, this marks the 11th time since March 2022 that the rates have been increased. However, what sets this meeting apart is that it is the first time since last spring that the Fed staff did not predict a recession in their forecasts. Moving on, the European Central Bank made a similar move in June by increasing its key interest rate to 3.5%, a 25 basis point rise. Along with this, they slightly adjusted their inflation projections, raising it to 5.4% (a one percentage point increase) for the year 2023. Lastly, the Bank of England decided to raise its policy rate by 50 basis points, bringing it up to 5% in June.

According to the Bureau of Economic Analysis, the US experienced a 2.4% increase in real GDP in the second quarter of 2023, when the growth from the previous quarter is considered on an annualized basis. Meanwhile, the Eurozone saw a 0.3% expansion in GDP during the same quarter, a 0.6% improvement from the previous year. Among prominent EU countries, France and Spain achieved growth due to stronger exports and tourism, Germany's GDP remained unchanged, and Italy experienced a decline. The OECD's June 2023 outlook predicts modest UK GDP growth of 0.3% for the year. China's GDP expanded by 6.3% year over year in the second quarter (compared to 4.5% in the first quarter), with encouraging year-to-date growth of 5.5%. Additionally, the OECD's composite leading indicators indicated signs of economic recovery across various countries.

In June, the industrial production index in the US went down slightly to 102 from its May level of 103. Furthermore, the purchasing managers' indexes (PMIs) in the US also experienced a decline in June. The manufacturing PMI hit its lowest point in six months, dropping from 48.4 in May to 46.3. Similarly, the services PMI decreased to 54.4 after reaching a high of 70.4 in May 2021. On a global scale, the manufacturing sector contracted at a quicker pace in June, as manufacturers either experienced a slowdown or a more significant contraction in their business activities. Conversely, the services sector continued to grow in June, although the rate of expansion slowed down visibly.

The employment situation continues to be challenging in numerous nations, as the rate of joblessness remains steady in most economies that were surveyed. However, due to seasonal influences, the unemployment rate in India increased to 8.5% in June, compared to 7.7% in May. In the United States, the unemployment rate rose slightly to 3.6% in June, slightly surpassing May's rate of 3.4%. In January 2020, the unemployment rate in the US was 3.5%.

Stock markets in India, Japan, and the US continued to rise in July, while other countries like Germany and Russia remained stable or saw further declines in their markets, like China, France, and the UK. The S&P 500 and Dow Jones had returns of up to 15.9% and 3.8% respectively, so far this year. The financial market seemed steady with an average CBOE Volatility Index of 13.3 in June. The value of the US dollar decreased when compared to major developed countries' currencies but fared better against currencies of developing economies.

In April, the amount of goods being traded globally dropped by 1.4% compared to the previous month (where it had dropped by 1.9% in March, but this number has been revised). This decrease can mainly be explained by decreases in emerging economies. However, in May, exports in the eurozone increased, resulting in a smaller trade deficit. The same was true for Brazil. On the other hand, exports decreased for China and Russia. Imports fell for Russia and the United States, but rose for Brazil and China. In May, the Container Throughput Index increased by 123.4 points compared to the previous month (where it had been revised to 122.3 points). European ports are seeing a continued decrease in activity, while Chinese ports are getting stronger. Furthermore, the pressure on global supply chains is currently at its lowest point since 1998.

Since the beginning of the pandemic, the nature of work has been undergoing changes. This includes not only what people do for work but also where they do it. According to a recent report from the McKinsey Global Institute (MGI), there is likely to be a decrease in demand for office and retail space in major cities such as Beijing, Houston, London, Munich, New York City, Paris, San Francisco, Shanghai, and Tokyo. In the MGI's moderate scenario, office space demand is projected to be 13% lower in 2030 compared to 2019 levels for the average city in the study. In the worst-case scenario, the most heavily impacted city could see a staggering 38% decrease in demand.

What causes this? Nowadays, workers spend much less time working at the office compared to the time before the COVID-19 outbreak. At the beginning of 2020, when remote and hybrid work models became the norm, the number of employees present at the office decreased by up to 90%.1 As hybrid work becomes a permanent arrangement, office attendance in major cities continues to decline by an average of 30%. On average, office workers now go to the office 3.5 days per week, as of October 2022 (ranging from 3.1 days in London to 3.9 days in Beijing).

The aftermath of the pandemic has caused noticeable consequences, as inhabitants have relocated from city centers and chosen to shop in different places. During the period from mid-2020 to mid-2022, the central areas of New York City experienced a decline of 5% in its population, whereas San Francisco faced a loss of 6%. Simultaneously, the number of people visiting stores in urban regions still lags behind pre-pandemic levels, with a decrease of 10 to 20% in foot traffic.

In any case, the desire for properties will fluctuate significantly depending on the distinctive features of each city. In areas with crowded corporate areas, costly accommodations, and numerous major employers in the knowledge-driven economy, demand might be lower. Nonetheless, cities have the ability to embrace flexible strategies that will enable them to adjust and flourish. Some key focuses could be creating communities that combine different purposes, constructing buildings that can easily be modified, and designing office and retail spaces that can serve multiple functions.

The Global Economics Intelligence (GEI) by McKinsey offers macroeconomic information and analysis of the global economy. Each month, they release a summary of important trends and risks, as well as detailed insights on national and regional developments. You can access the full report for July 2023 here. Additionally, they have visualized data on the global economy and specific economies available as PDF downloads on McKinsey.com. These reports are free for email subscribers and can also be accessed through the McKinsey Insights App. If you want to subscribe and receive these reports, click here. The GEI is a collaboration between McKinsey's Strategy and Corporate Finance Practice and the McKinsey Global Institute.

The information and evaluation in McKinsey's Global Economics Intelligence are created by Jeffrey Condon, a seasoned specialist in McKinsey's Atlanta branch; Krzysztof Kwiatkowski, an expert at the Waltham Client Capability Hub; and Sven Smit, a high-ranking partner in the Amsterdam branch.

The writers would like to express their gratitude to Nick de Cent, and also to José Álvares, Fiorella Correa, Juhi Daga, Darien Ghersinich, Pragun Harjai, Ricardo Huapaya, Yifei Liu, Marianthi Marouli, Tomasz Mataczynski, Frances Matamoros, Erik Rong, Paula Trejos, and Sebastian Vargas for their valuable input to this blog post.

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