The strongest headwind for the global economy has shifted from an energy crisis and the related squeeze on real incomes to a potential banking crisis and associated drag on credit.

We do not anticipate a full-blown banking crisis, but we do expect a tightening of credit conditions to weigh on economic activity across the board. With central banks still mindful of inflation risks, interest rates will stay at their peaks for several months. The lagged effects of previous policy tightening have begun to happen as we had long warned that they would. The most prominent evidence of this has been in the banking sector, where the collapse of two U.S. banks and forced takeover of Credit Suisse have raised fears about the health of banks more generally.

Additionally, labor markets in the United States, Europe and other developed economies have continued to show remarkable resilience, contributing to sustained robust household spending. Amid widespread worker shortages and low unemployment rates, wage gains have picked up. Employment rates are at record high levels in many developed economies with gender gaps narrowing since the pandemic.