Macroeconomic house view – July 2023

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Global outlook

The global economy remains resilient despite the most aggressive tightening cycle of the past 40 years. Although the economy will continue to weaken, the risks of recession have diminished greatly in recent months. The prolongation of the economic cycle continues. We expect further quarters with low or even negative growth, followed by a moderate recovery.

Surplus demand and low unemployment rates remain characteristic of labour markets. For one, this is helping to improve consumer confidence. However, the mood is being dimmed somewhat by the economic leading indicators. The downward trend in manufacturing continues unbroken, and also the services sector, which was strong in the first half of the year, is gradually losing momentum. In particular, higher financing costs and stricter lending criteria will slow economic expansion in the coming quarters.

There is now no question but that headline inflation is falling just as quickly as it had risen. However, there are reasonable doubts as to whether it will fall fast to central banks’ target rate of 2%. Core inflation in particular remains too high, and it is possible that, after pausing for a time, central banks will be forced to resume monetary tightening. Given the variability in the time lag between tightening cycles and when they take effect, central banks will have to tread the fine line between necessary and recessionary policy for some time to come. However, the details of the situations in the major economic regions are very different.

“Current inflation figures are encouraging but
Fed chief Powell has made it clear
that it is too early to say the battle against inflation has been won.”

Michael Blümke

U.S.

Contrary to general expectations, the U.S. economy did not contract in the first half of the year, and most of the recent economic data have exceeded predictions. But growth is set to slow in the United States, too, as leading indicators point to weaker future economic activity, with moderate expansion in the services sector and a stabilisation in manufacturing. However, there are no signs of imminent recession. While the real estate sector remains weak, home sales are currently recovering. Industrial production may also have bottomed out. Full employment and a historically high job vacancy rate are boosting consumer confidence. Personal income remains stable and people are able to build up their savings again slowly. Falling wage pressure supports the theory that the Fed has made tangible progress in reducing overall demand and curbing inflationary pressure. Current inflation figures are encouraging but Fed chief Powell has made it clear that it is too early to say the battle against inflation has been won. According to the central bank, whether July’s interest rate hike will be the last of this cycle strongly depends on the data. The fact is that the Fed has so far managed to curb inflation without triggering a significant economic downturn, thanks to their rapid and decisive action. The chances of a soft landing are becoming more and more realistic.

Eurozone

The eurozone economy was also surprisingly resilient in the first half of 2023. However, the flagging momentum described a month ago has been confirmed. The vulnerability of the European economy is clear from the low productivity, weak retail sales and the veritable collapse of manufacturing. The real estate sector remains under considerable pressure, and the tightening of lending criteria is essentially stifling growth. The positives are the labour market, which remains robust, and inflation, which has fallen considerably. However, it must be said that core inflation remains uncomfortably high due to sharp increases in wages. This puts the ECB – which began tightening much later than the Fed – in the dilemma of having to overstretch the economy to curb inflation in a lasting way.

China

The economic data out of China have been rather modest of late. It was unable to maintain Q1’s strong growth in the months that followed. The services sector, which was the driving force behind the post-pandemic recovery, is showing signs of weakness. Asset investments and imports are down, the real estate sector is still stifling growth, and international demand remains weak. The fact that the leading indicators for manufacturing, albeit contractionary, are stabilising could be regarded as a first positive sign. We see the statements from policy makers after the July meeting of the Politburo as the second positive sign. They highlighted the need for more-targeted political measures to restore private-sector confidence, to boost investment and to support the real estate sector. We believe it’s time to back up these words with action to ensure a sustainable and solid recovery.