- 11th April 2023
- Posted by: Celticfp
- Category: Investment Committee
Glimmers of Hope: A Spring Forecast for the Global Economy
Is there hope for the global economy after the dark days of winter? As the second quarter commences, it appears that the chances of a worldwide recession have decreased compared to the end of last year. Several events that took place during the first three months of the year have reduced the likelihood of negative growth in most regions over the next 12 months. The only exception is the US, where the possibility of a recession has slightly increased, but this may have actually lowered the chances of a global recession even further.
In March, there was a surge of distrust in banks, which reminded investors and capital markets of the global financial crisis. Bank lending was already tightening, and events in March only made things worse. However, instead of causing a collapse, markets viewed this as a help in central banks’ fight against inflation. Nonetheless, persistent inflation makes it more challenging for central bankers to make decisions, and even more challenging for strategists to forecast.
The latest economic data only adds to the evidence that higher rates in the US are creating a more difficult environment there than in other regions. Although the industry has already been slowing down, rates are more focused on services, which had been expanding intelligently. The data from the Institute for Supply Management (ISM) showed an unexpected decline, still at a slightly expansionary level of 51.2, but below the “inflationary” level of 52.
It is possible that the weak data from March was directly caused by the concerns about banks. Those fears have dissipated quickly, and apart from equity holders in banks (and Additional Tier 1), very few people have suffered. In that sense, forthcoming data could rebound, and inflation could also rise. If that happens, we will be back to square one, only with a weaker set of small businesses.
Currently, the risks seem to be finely balanced. Will inflation continue to decrease, or will another financial sector meltdown force central banks to become more dovish? A brief evaluation of the global economy shows that the forecasts of an impending recession that dominated last year’s predictions have proven somewhat pessimistic. Nevertheless, economists were generally of the opinion that a stronger-than-expected 2022 would lead to less strength in 2023, so forecasts for the first two quarters of this year were adjusted downwards.
Once again, the world’s major regional economies have proved to be more resilient than forecasts suggest. For us, the most notable improvement has been in the Eurozone, where economists now predict that gross domestic product (GDP) will increase by 0.5% quarter-on-quarter or 2.1% annualized. By comparison, US GDP is expected to rise by 0.3% quarter-on-quarter (1.3% annualized). The motivation for these better expectations has come from declining gas and electricity prices.
Expectations for China’s growth this quarter have also been upgraded. While China’s rebound was slower than expected, next quarter’s expectations have been raised significantly to a year-on-year growth level of over 7%. Furthermore, travel freedoms have extended some of the benefits to the rest of Asia. Meanwhile, Japan’s growth predictions remain positive, but optimism has waned, going against the trend in other regions.
Although consumer confidence has generally improved, house prices remain under some global pressure, and construction has become somewhat subdued. Business confidence has also improved, and service businesses have become more positive. Manufacturers are still generally pessimistic, even though things are not deteriorating.
Overall and in aggregate, the first quarter was slightly better than expected. However, the global economy is not growing significantly, making the financial ecosystem somewhat fragile.
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