What we know about the global economy so far: a timeline

Fahad Kamal, chief investment officer at SG Kleinwort Hambros, finds the current global economy to be “slightly muddled” right now, but his base case remains that recession is “likely” in the US, and “possible in Europe.”

He said: “The backward-looking data points seem to be quite positive, while the sentiment surveys which are forward-looking, those seem to be less positive.”

What does the official data suggest so far in 2023?

One hint as to where the global economy may be going, came in the recent IMF economic outlook document published on January 31, according to Kamal.

Much attention was focused on the conclusion this document reached that the UK would be the only major economy to enter recession this year.

But Kamal tells FTAdviser the document also showed the IMF forecasting that around half of all of the economic growth to be generated in the world this year will come from India and China, with the Eurozone and the US, “responsible for only around 10 per cent between them”. 

He cautions that there is typically a lag of around 18 months between monetary policy being tightened and its impact being properly felt in the real economy, and notes that it is just 11 months since the first US rate rise took place. 

Then there is the latest economic data from the US.

The most recent employment data to emerge from the US, published on February 3 and covering the month of January showed a net half a million new jobs were added, while the data for the previous months was also revised in a way that paints a more positive picture. Those half a million extra jobs were far in excess of the !80,000 extra jobs the market had forecast would be added.  

Steven Bell, chief economist at Columbia Threadneedle, says the economic data emerging from the US is “very confusing” right now, but under the bonnet is probably going to be better for bonds than equities. 

Bell is a veteran economist and a former economic adviser to the UK Treasury, and says he “wouldn’t blame” any financial adviser for finding the economic data coming out of the US “confusing right now, because to be honest it has confused me.” 

Bell says: “There are at least two related areas of confusion. The first is that the labour market is super tight. Whatever angle you look at it from, there is strong demand for workers, but not enough supply of workers. And of course that means higher wages. The latest numbers do show that wage growth slowed a bit but it is still high.”

But Bell said this came in the wake of other data which was less positive, hence the confusion. 

He said: “On the other hand, the housing market data, (which was issued on January 26) shows it is in recession, while manufacturing companies have a lot of inventory. I confess to being surprised at the slow down in wage growth, but at 5 per cent it is still quite high.” 

Bell’s view is that “different parts of the US economy are performing very differently to each other, with the services sector in very strong shape, while construction is in trouble.

"I think the reality is that the US economy is neither booming nor on the edge of recession. And I think the Federal Reserve is going to keep raising rates until they see that wage growth end.”

Chinese expansion and reopening

Dario Perkins, managing director for global Macro at TS Lombard says that part of the reason optimism has started to seep into market and economic forecasts is in expectation of the performance of the global economy “decoupling” from that of the US, with the latter economy weakening this year, but China’s expansion enabling emerging markets and European economies to avoid recession. 

The most recent economic data to emerge from China, released on January 17, showed the economy grew by just 3 per cent in 2022(which is both the lowest level in China for many years and lower than the UK achieved), but that growth rate occurred during a period of covid restrictions.

Perkins says: “Taken together, China’s reopening and lower European energy prices could lend important support to the global economy this year, providing a degree of resilience even if US economic activity continues to deteriorate.

"Indeed, with the US dollar already down significantly and non-US equities outperforming, there is even talk of a ‘decoupling’ in global markets. The decoupling theme is often a dangerous one.

"Since European GDP and inflation tend to lag the US, episodes of decoupling tend to be short-lived, with the rest of the world eventually succumbing to US-led downturns.”

Perkins agrees that European economies will be the biggest beneficiaries” of China’s re-opening, principally as a result of increased demand for consumer goods, but he questions whether the “magnitude” of the impact will be sufficient for Europe to overcome the impact of the decline of US economic performance. 

He feels that when populations exit lockdowns, they tend to consume services and goods which are available closer to home, rather than exports, and this reduces the “spillover” impact into the wider global economy.  

European strength

But European data has been interesting, with German GDP declining by 0.2 per cent in the final quarter of 2022 (in the same period UK GDP was flat), and for the wider Eurozone, growth was 0.1 per cent. 

What does this mean for investors?

In terms of what this means for investors, Bell says it is unlikely that inflation can fall in the US unless corporate profit margins fall, something which would be expected to be negative for equities, then inflation in the US cannot fall. 

In contrast, he feels that fixed income assets, particularly inflation linked US government bonds are attractively priced right now. 

One investor who has unpicked the bonds/equity conundrum and come down firmly against US equities is Jasper Thornton Boelman, investment director at Parmenion, who cut a further 3 per cent from his US equity exposure last month, and placed the capital into bonds. 

Recession is our base case so we think caution is warranted right now.Fahad Kamal, SG Kleinwort Hambros

He says this was a consequence of his view that: “The yields on offer within Sterling Corporate Bonds are relatively attractive and look to be compensating investors well, even when accounting for the potential risks of slowing economic growth ahead.

"Conversely, the US equity market appears fully valued, with the market anticipating the ‘soft-landing’ scenario. We see risk to the downside in this assumption, hence the reduction.”

Kamal says: “Recession is our base case so we think caution is warranted right now. But one area where we are overweight is emerging markets. Emerging markets tend to have very long uptrends and very long downtrends. Valuations right now are the cheapest they have been for many years relative to developed market equities.

"The weakening of the dollar boosts the investment case for emerging markets, and while emerging markets often underperform when global GDP is declining, I think the low valuations make up for this.”    

David Thorpe is investment editor at FTAdviser