A just-published report updated our view on the global investment outlook. The financial markets are gripped in a debate about whether and when the U.S. economy will succumb to a recession, and presumably drag the global economy down with it. We disagree with this view, and in fact are starting to see the green shoots of better growth in the euro area and China/Asia.
The past few years has been unprecedented in terms of economic and policy developments, with the added twist of lingering repercussions from the pandemic and a war and energy crisis (in Europe). Economies are de-synchronized internally (previously excessively strong goods demand and now a transition at varying speeds towards services spending), and externally as highlighted last year with the locked-down Chinese economy yet a solid U.S., with the euro area economy somewhere in between (in view of its weakness in the second half of the year). Needless-to-say, most traditional leading economic indicators are having a difficult time “forecasting” where we are headed.
The report highlighted that the MRB Recession Checklist Indicators are still signalling only a growth slowdown in the U.S. The same gauge for the euro area is more bearish, albeit many of the key factors undermining the regional economy in 2022 are reversing, particularly the energy crisis and its impact on economic sentiment and spending, along with the difficult external trade backdrop. Sequential economic indicators have recently firmed in the euro area, and China will be the next to revive after finally abandoning its failed COVID-zero policy in December.
Net: don’t bet on a recession in 2023, and be wary of forecasts of Fed and other central banks lowering policy rates starting later this year – the cyclical bond bear market is not over, it is just on another hiatus.