Global economics: risks tilted to the downside, but consumers are in the driving seat
Slowdown or slump? The jury is still out. The picture being painted is increasingly bleak but there are nuances to the story.
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The expectation is that global GDP growth will slow from 3.6% in 2022 to 2.9% in 2023 as contractionary monetary policy begins to bite. Global output contracted in the second quarter of this year with weaker growth in many large economies.
Unfortunately, as pointed out by the IMF the ‘risks [are] overwhelmingly tilted to the downside’. The September World Economic Forum Chief Economist Outlook document noted that “leaders face a catalogue of challenging decisions and trade-offs. As policy-makers seek to rein in inflation they risk triggering recession and a spike in unemployment.
Almost two-thirds, 64% think a global recession in 2023 is somewhat likely, a further 9% think it’s extremely likely.
GDP not telling full story and labour markets continue to defy
Despite two consecutive quarters of economic contraction in the US, an expanding labour market, among other indicators, contradicts the recession narrative.
So far in 2022, 438,000 new jobs have been created on average each month. For context, in 2008 job losses began in January predating the official beginning of recession in Q3.
Other indicators which the NBER, the organisation which categorises recessions in US, look for paint a mixed picture but one that suggests a slowdown from the rapid bounce in 2021 rather than a reversal.
Consumers hold the balance between slowdown and slump
Consumers who account for the lions share of GDP, hold the key, notes UBS Chief Investment Officer, Paul Donavan. “But consumer reaction functions are not normal, consumer balance sheets are not normal, and the labour market is just weird.”
Despite new depths on sentiment indicators, balance sheets are healthier than any other downturn.
Whilst that remains the case, we may see consumption diverted as cost-of-living pressures continue to grow. Excess savings, whilst dwindling a little, remain strong. For example, at the end of Q2 households held an estimated £182bn in excess savings in the UK and $3.7 trillion in the US.
This is one measure we will continue to watch as inflation climbs to new highs; CPI currently stands at 10% in the Eurozone in September, 8.2% in the US and 9.8% in the UK in August.
There are tentative signs of potential peaks having, or nearing being, peaked as producer price inflation starts to ease and global PMIs indicate that supply chain disruptions continue to ease.
In another indications, Hong Kong has eased travel restrictions and rules which show the direction is still to be more open.
Energy remains a watched indicator with the security of supply starting to weigh on sentiment across Europe. The Nord Stream 1 pipeline was shut down at the end of August ‘until Europe lifts sanctions.’
Tensions flared and fears of further acts with suspicions of sabotage of the pipeline which would further squeeze resources. There may be some rationing across the continent, and it is likely we will continue to see energy supply pressures feed through to inflation.
Debt cost increases as interest rates climb
This may alleviate in a years’ time. The Federal Reserve has raised the interest rate by 300bps so far in 2022 and has been joined by a host of others, including the European Central Bank (ECB), Switzerland’s National Bank and Sweden’s Riksbank implementing sizeable rises.
More is to come. Consensus is that with cooling economic growth, as long as inflation subsides, central banks may be forced to pause or reverse in the middle of 2023 – although central bankers after the annual gathering in Jackson Hole indicated that higher rates are here to stay.
It is clear economic headwinds, or storms, are gathering with few, but some, bright spots. The inflation and interest rates story clearly has further to run later this year and will likely dominate headlines in 2023 as well.
But should inflation lose steam and labour markets remain healthy, it will be bumpy ride but not a cliff-edge. Which forces will win out will only become clearer with hindsight.
Read more or get in contact: Flora Harley, residential research