This has been cut and pasted from Invesco’s mid-year investment outlook received this morning, 21/07/2023:
In an effort to curtail the worst inflation in decades, Western developed central banks have moved aggressively to tighten monetary policy. This has helped exert downward pressure on inflation but has also brought about a meaningful slowdown in global growth and some financial accidents, including several US regional bank failures.
However, against this backdrop, we see resilient domestic demand in many economies, especially in services. Our base case anticipates a relatively brief and shallow economic slowdown as inflation continues to moderate and monetary policy tightening nears an end, followed by a recovery.
We call this a bumpy landing because there will continue to be some economic damage in this scenario. We believe there is the possibility of a downside scenario – a “hard landing” – in which global growth is hit harder, with a recession first in the US, which then cascades into other economies.
We also believe there is the possibility of an upside scenario – a “smooth landing” – in which monetary policy impacts growth less than expected and the global economy is relatively unscathed. In the US, we believe rate hikes are ending, and US inflation will continue to fall significantly, albeit imperfectly.
While discussion of a recession in the US is now commonplace, we continue to believe the US is likely to avoid a substantial broadbased recession. Instead, we expect some weakness in the second half of this year as policymakers accomplish a bumpy landing, but we anticipate activity will nevertheless remain relatively resilient.
As we enter 2024, we expect a more positive growth outlook to unfold as the economy recovers. In our view, the eurozone and UK are likely to follow a pattern similar to the US, but with a lag.
A variety of forces have helped sustain European economic momentum so far in 2023, but we expect tightening financial conditions to weigh on credit growth over time, helping to reduce inflationary pressures but also causing a significant economic slowdown.
In contrast with many major developed market economies, China is in a markedly different place in its cycle. The relaxation of COVID-19 restrictions has driven a meaningful though uneven recovery. The reopening is largely benefiting the services component of the economy while slowing growth momentum globally has meant weaker-than-hoped manufacturing activity.
Nevertheless, China remains a bright spot with subdued inflation and a robust growth outlook. We expect continued accommodation from the People’s Bank of China (PBoC) through the rest of 2023.
In short, we believe we are at a policy peak, that disinflation is underway, and that a relatively brief global economic slowdown is occurring, but markets are likely to soon look past this episode and begin to discount a future economic recovery.
Comment
For circa 40 months conditions have been challenging with volatility ongoing, and for the last couple of years markets have really just traded sideways.
It will be good to see inflation coming under control in the US, and an economic recovery. China should help too, lifting the Asia region, and in turn, both the US and China aiding the economic recovery globally.
2024 will hopefully be a better year for invested assets.
Steve Speed
21/07/2023