24 January 2023
Recession news from World Economic Forum
Though many of us have tried to remain positive in the face of a recession, it seems worries have reached their peak and resultantly paused the progress of global markets last week.
It seems that focus may be shifting according to observers. Where the narrative was once all about the hiking cycle of central banks’ rates, more attention is now being placed on the slowdown of market growth.
World leaders gathered at the World Economic Forum’s annual meeting in Davos last week after a three-month hiatus. The results of a survey of senior economists conducted prior to the event overshadowed some of the excitement, as they showed that two-thirds of the economists anticipate a global recession this year.
The leaders attending the conference, though, seemed to be in a more optimistic frame of mind. Gita Gopinath, Deputy Managing Director of the International Monetary Fund, hinted that the fund might raise its 2023 growth predictions as a result of recent encouraging data from the US and Europe. Germany’s chancellor predicted that the largest economy in the eurozone would avoid a recession, and the think-tank ZEW said that investor mood had improved for the first time since Russia’s invasion of Ukraine.
Future of the UK economy remains bleak
The FTSE 100 Index was approaching its 2018 record high at the start of the week. European markets were getting close to a nine-month high thanks to rebound hopes in China and decreasing inflation worries. By the end of the week, however, disappointing retail sales figures and reports of declining consumer confidence served as a reminder to investors of the UK economy’s bleak outlook.
Bank of England Governor Andrew Bailey responded to the news that UK inflation fell to 10.5% in December by speculating that it may be a sign that “a corner had been turned” and that inflation might be on an “easier path”. But according to the BoE, the UK is still set to experience a long, shallow recession. According to Bailey, the risk premium on UK assets that Liz Truss’ budget programme had created last year has “pretty much gone”, but confidence is still shaky.
Interest rates were expected to increase to 6% following the turmoil. But markets now anticipate a 4.5% peak and a base rate increase from the BoE to 4% on 2nd February.
More job cuts and a weak dollar in the US
Google’s parent company Alphabet followed Microsoft and Amazon’s lead and announced major job cuts in the US last week. As the hypergrowth the sector saw during the pandemic period slows down, it is predicted that over 200,000 industry employees have lost their jobs since the start of 2022.
On Wednesday, the dollar experienced its biggest plunge since the aftermath of the global financial crisis and touched a seven-month low as larger-than-anticipated drops in US retail sales and producer prices fueled rumours that the Federal Reserve might loosen monetary policy. The Fed is becoming increasingly more likely to shift to 0.25-point increments. Columbia Threadneedle suggested:
“We currently have traders putting a five per cent chance on a 0.5 percentage point increase at the next Fed meeting. It’s not often you get that kind of certainty.”
The dollar’s decline has increased the value of developing market stocks. The cost of importing commodities into developing countries has been reduced because of a weaker dollar, which also lowers the cost of servicing debt in the currency. The MSCI Emerging Markets index has increased by 8.3% this year, compared to a fall of 22% in 2022.
Another factor has been the quicker-than-expected reopening of China’s economy following the COVID-19 lockdowns. The economy’s near-term outlook has undoubtedly improved, and industries that cater to consumers stand to gain the most from the built-up demand.
China’s market recovery
Data released last week revealed that China’s economy fared better than anybody had anticipated in the fourth quarter; GDP stalled at 0.0%. However, growth of 3% over 2022 represented the worst economic slump for China in close to 50 years.
According to a Reuters poll, growth will rebound to 4.9% in 2023. A robust recovery in China might ease concerns about a global recession, but it could also aggravate inflationary problems at a time when policymakers are just beginning to control them.
Nevertheless, this year’s improved growth is not expected to signal the end of the structural slowdown that started more than 10 years ago. According to data from the National Bureau of Statistics, China had its first population decline in 60 years last year.
Artisan Partners emphasised the need for patience from investors, pointing out the difficulties of the previous year and the uncertainty of 2023. They said:
“Rising interest rates, the war in Europe and the prospect of a recession loom over the stock market, keeping stocks cheap.
“Turns in the market come very quickly, out of nowhere, and often when things feel the worst. Wars end. Inflation ebbs. Recessions come and go. Ultimately, valuation is the best measure of future returns. We have added aggressively to our holdings in this past year at attractive valuations. We expect to be very well rewarded for buying when others are selling.”