Market Musings 180623: A Glass Half-full View Of The Global Economy

18th Jun '23 by Edmund Shing

3 comments 1273 reads

Market Musings 180623:
A glass half-full view of the global economy

Is a soft landing still possible?

Weekly Podcast:
Our investment strategy for June 2023

Will US, EU and UK central banks raise interest rates further?
Could we see surprisingly large falls in inflation over the summer months?
Is global economic growth also slowing rapidly?
What supporting factors do you continue to see for stocks?
Should one follow the retail crowd and invest today in US mega-cap tech?

Summary

Rising interest rates usually result in recession
Rising unemployment appears with a lag - still waiting…
Construction demand still surprisingly robust
Manufacturing activity has weakened, but the momentum has improved
Inflation is falling in US, Europe, not a problem in China

An Optimist’s View of the Global Economy

Fears of economic recession - i.e. of a sustained fall in economic activity including higher unemployment and company bankruptcies - are widespread, and have been for some time.

Rising interest rates usually result in recession: The sharp increase in interest rates by key central banks such as the US Federal Reserve, the European Central Bank and the Bank of England over the last 12 months are having the intended effect of slowing demand by making loans and credit more expensive for households and companies to finance.

Slowing of consumer and investment demand, combined with more cautious company expectations, tend to result in a rising unemployment rate. This then has the effect of slowing consumer demand yet further.

At this point, households become more cautious on the outlook for their own future income and so spend less and save more (so-called “precautionary saving”). Economic activity then slows yet further, encouraging households and companies to become even more cautious, ending up in a spiral into recession.

Rising unemployment appears with a lag: Thus far, higher interest rates is indeed slowing demand, but this has so far not resulted in higher unemployment in the US, Eurozone or the UK. Rather, in each region total employment remains at historic highs…

US Non-Farm Payrolls Grow, Well Above Pre-COVID Levels

Source: St. Louis Fed FRED

UK Total Employment Back to Pre-COVID Peak

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Epitychia

19th Jun '23

Thanks Edmund. What is surprising is how difficult this is to forecast. In 6 months we could be in an enormous recession, or perhaps have just suffered a slow down.

FWIW i think a recession is 'overdue'. In some ways we need one to clear the dross and then build on solid foundations.

BnB

Schneider Electric is my largest holding outside the usual suspects of MSFT, GOOG etc and is a standout stock in the energy transition. It's been a great investment and has consistently beaten expectations over many years. Compared to high quality industrials like Spirax, Atlas Copco etc it's less expensive on fundamentals yet has the most powerful growth drivers. Not expensive today, it will definitely fall hard on any conclusive signs of a recession in its markets and I would recommend taking a good look in advance of that possibility. Meanwhile, today's levels remain reasonable for a structural winner. ABB is much more cyclical so I would be more wary.

XTR

23rd Jun '23

Great piece as usual from Edmund.

What concerns me about taking an overly optimistic view is that around 50% of GDP is government [deficit] spending which means more borrowing, that will exacerbate inflation and require more rate hikes, that in turn require the government to borrow even more to pay the higher coupons on the debt and so it goes. This will of course benefit the markets, but at the cost of higher debt to GDP ratios, which some might say, are already un-payable. Japan has probably gone further down this route than most and now has a debt to GDP ratio of over 250%, and finances themselves by buying their own bonds, all at the expense of the [negative yielding] Yen.

Soft landing for a while perhaps, but won't this all end in some sort of monetary reform?

Market Musings 180623: A glass half-full view of the global economy