The Take: Connecting the Dots Between Interest Rates, Inflation and the Real Economy


What’s News

The Federal Reserve Bank raised interest rates by a quarter point today, reflecting a cautious response to signs that inflation in the U.S. is slowing. But despite the Fed’s less aggressive stance, many uncertainties remain for both the U.S. and global economy.

SAP’s Take

“Global economies and risks are interconnected more than ever,” says Prashanth Reddy, an economics expert at SAP. “The interaction among concurrent risks creates a more significant impact than the sum of individual risks. For example, the Russia-Ukraine war is causing global energy and food crises.”

As Reddy notes, the World Economic Forum introduced the term “polycrisis” in its Global Risks Report 2023, in order to capture the interconnected nature of global risks and their impact on world economies.

“In this connected fast-changing world, the response to COVID-19 forced many countries to respond with near-zero interest rates, quantitative easing, and government transfers to support their unemployed citizens,” says Reddy. “These policies and supply shocks created a rapid increase in inflation in 2022. “

In response, many developed countries rapidly increased interest rates to curb the inflation causing a global economic slowdown. According to the World Bank, global growth is expected to decelerate sharply to 1.7% in 2023. The world’s three major engines of growth — the U.S., the eurozone, and China — are all undergoing a period of pronounced weakness.

Reddy believes the U.S. economy will experience a moderate recession in 2023, amid slow wage growth despite a historically low unemployment rate. According to FactSet, U.S. economic growth is expected to be around 0.4% with consumer price index (CPI) inflation at 3.8%. After the latest move, the Fed is expected to hold rates at between 4.5% and 4.75% for nearly all of 2023 before systematically easing.

According to FactSet, China is expected to grow 4.7 % in 2023, and the eurozone to decline at -0.1%. Economic growth in emerging markets (EMs) is forecast to remain essentially unchanged at 3.4% in 2023, according to the World Bank. EM economies face the prospect of being further hurt by the higher commodity prices, monetary policy tightening, rising debt service costs, higher interest rates in developed nations and a strong dollar, according to Reddy.

This also translates to slower IT spending in 2023 at three percent in the U.S. and 2.1% in the EU, according to a Morgan Stanley CIO survey. Nevertheless, CIOs expect software spending to outpace growth in other industries at 3.3% in 2023.

Ilaina Jonas, Senior Director of Global Public Relations, SAP
+1 (646) 923-2834, ilaina.jonas@sap.com