Tuesday digest

Posted 11 April 2023

Overview: A spring of hope after the gloom of winter?
As the second quarter gets under way, the chances of a global recession seem lower now than they were towards the end of last year. Indeed, a combination of events during the first three months of the year have arguably reduced the likelihood of negative real growth occurring in the next 12 months in most regions. The exception is the US, where chances have increased marginally – the most interesting outcome of this is that it may have reduced the chances of global recession even more.

March saw a flare-up of bank mistrust, which gave investors and capital markets an uncomfortable reminder of the global financial crisis. Bank lending was already tightening and events in March will have made it worse. But rather than tipping things over the edge, markets have viewed this as helping central banks in their inflation fight. Even so, still-sticky inflation makes it harder for central bankers to decide how to proceed, and even harder still for strategists to forecast.

Last week’s crop of economic data only added to the evidence that higher rates in the US are creating a more difficult environment there than elsewhere. Industry has already been slowing, but rates are more keyed on services, which had been expending smartly. The data from the Institute for Supply Management (ISM) showed an unexpected fall, still at a mildly expansionary level of 51.2 but below the ‘inflationary’ level of 52.

It may be that the weaker data from March was directly caused by the fears about banks. Those fears have passed quickly and nobody other than the banks’ equity (and Additional Tier 1) holders have suffered – a very small group. As such, the forthcoming data could bounce back and, with it, inflation. In that case, we’ll be back to square one, only with a weaker set of small businesses.

Right now, the risks feel finely balanced. Will inflation continue to decline, or will it take another financial sector blow-up to make central banks more dovish? At this point, we are happy enough to have stocked up on long maturity bonds in our portfolios after yields spiked higher, but otherwise we remain neutral on risk as the second quarter of 2023 runs its course.

A brief assessment of the global economy
The predictions of imminent recession that pervaded forecasts last year have so far proved somewhat pessimistic. However, economists were generally opining that a stronger than expected 2022 would mean less strength in 2023, so forecasts for the first two quarters of this year were adjusted down.
Yet again, the world’s major regional economies continue to be more resilient than forecasts would suggest. For us, the most notable improvement has been in the Eurozone where economists now estimate gross domestic product (GDP) to rise 0.5% quarter-on-quarter, or 2.1% annualised. By comparison, US GDP is estimated to rise 0.3% quarter-on-quarter (1.3% annualised). The motivation for better expectations has come from falling gas and electricity prices.

China’s growth expectations were also upgraded for this quarter. While China’s rebound proved slower than expected, next quarter’s expectations have been upgraded substantially to a year-on-year growth level of above 7%. Moreover, travel freedoms have spread some of the benefit to the rest of Asia. Meanwhile, Japan’s growth estimates remain positive but optimism has faded, against the trend of other regions.

While consumer confidence has generally improved, house prices remain under some pressure globally and construction has become quite subdued. Business confidence has also improved, and service businesses have become positive. Manufacturers are generally pessimistic still, even if things are not getting worse.

So, overall and in aggregate, the first quarter was a little better than expected. However, the global economy is not growing significantly, and that makes the financial ecosystem somewhat fragile. Perhaps economists remain more concerned about risks than resilience so low expectations can still be beaten for the rest of the year. Much will depend on a resumption of progress towards lower inflation.