Monthly House View - February 2023 - Download here
In July 2022, when peak pessimism was reached, the word “recession” featured more than 50,000 times in articles on Bloomberg. Over the last 12 to 14 months, we have seen consistent negative revisions of macroeconomic forecasts with the consensus systematically revising growth down and inflation up for 2022 and 2023. But, after a while, the momentum slows and reverses. The real question is whether we have reached this inflection point.
In 2023, the consensus is for a soft landing for the global economy with a slowdown, but no recession. Is this really credible? Isn’t the risk rather that there will be no landing? It may indeed be possible that growth will accelerate much faster than expected, thanks in particular to the impetus of China and a less fragile American consumption in a context of disinflation.
Europe is effectively flirting with recession, but the first quarter may harbour some surprises, positively supported by these factors and by a less severe winter than expected.
Will that be enough to solve all our problems, especially those caused by rising interest rates and inflation?
Only partly, because in the current environment, interest rate hikes seem to take longer to impact the real economy than in the past and their impact will probably be less extreme:
- Indeed, a majority of American and Euro Area households have long-term fixed-rate debt and are therefore not impacted immediately by this rise in mortgage rates. While the 30-year mortgage rate in the United States has risen from 3.5% pre-COVID to 6.5% today, only 10% of households have adjustable-rate mortgages (compared to 35% before the 2008 crisis).
- In addition, household levels of indebtedness are lower than they were before the pandemic (at 66% of GDP vs. 85% in 2008).
- The labour market also continues to provide support. With an unemployment rate in the US of 3.5%, we are back at levels last seen when the first man walked on the moon!
- Finally, bond-issuing companies in both the US and Europe will be under less pressure when repaying debts that mature this year.
In terms of inflation, the situation is set to improve. Our scenario resembles that of the square root in that inflation may, in the short-term, fall much more rapidly than forecast due to the most volatile factors (energy, etc.) as a result of base effects, a milder winter in Europe, increased levels of supply with the reopening of China and levels of demand that are falling slightly in developed countries. In time, however, our view is that inflation will stabilise at a higher level than forecast by central banks.
While many central banks in emerging countries (other than China) are likely to begin lowering their key rates this year, the European and US central banks will probably also soften their restrictive tones on interest rates.
The key element remains China, which, despite some long-term indebtedness, is in the process of opening up with significant potential for short-term internal consumption. Chinese tourists are the first global consumers: their consumption in 2019 was twice that of US tourists. We are currently far from pre-crisis levels of potential. We know from surveys that Chinese households are intending to take signficantly more weeks of holiday than normal, starting with the Chinese New Year period, and thereby may begin to significantly increase their levels of consumption, just like the Americans and Europeans did when the lockdowns ended. China will then normalise its production capacity and this should give impetus to the global economy.
Monthly House View, 20/01/2023 release - Excerpt of the Editorial
January 30, 2023