Despite the most intensive monetary policy tightening measures of the last four decades, the global economy is showing remarkable resilience.
The global economy remains robust despite the most intensive monetary policy tightening cycle in the last 40 years. Recession risks have fallen, although the economic slowdown continues. The prolonged economic cycle is continuing, with weak or negative growth expected in the coming quarters, followed by a moderate recovery.
Labour markets show sustained demand and low unemployment rates are strengthening consumer confidence. However, early economic indicators are clouding the outlook. Manufacturing industry continues to weaken, as does the previously strong service sector. Higher financing costs and stricter lending policies are slowing growth.
Overall inflation is now falling just as quickly as it previously rose. However, the target of 2% set by central banks may be questionable. Core inflation in particular remains high, and central banks may consider tightening monetary policy again after a pause.
The temporal variance of tightening cycles and effects forces central bankers to consider the fine line between necessary restrictions and potentially recession-inducing policies. The situation varies in different economic regions.
The Eurozone economy has shown astonishing resilience in the first six months of 2023, although the declining momentum described is confirmed. Weaknesses in the European economy are evident in low productivity, weak retail sales and the collapse of the manufacturing sector.
The property sector remains under heavy pressure and stricter lending standards are fundamentally hampering growth. Nevertheless, the stable labour market and the significant fall in inflation are positive factors. However, core inflation remains uncomfortably high despite rising wages. This situation presents the European Central Bank (ECB), which started tightening measures later than the US Federal Reserve, with the challenge of placing a heavy burden on the economy’s resilience in order to control inflation in the long term.
Contrary to expectations, the US economy did not contract in the first half of the year and the latest economic data has exceeded forecasts. Nevertheless, growth in the USA will decline, as early indicators point to a slowdown in future economic activity. Moderate growth is expected in the services sector, while the situation in manufacturing industry is stabilising. Despite this decline, there are currently no signs of an imminent recession.
The property sector remains weak, but house sales are currently recovering and industrial production may also have bottomed out. Full employment and the high number of job vacancies are boosting consumer confidence. Personal incomes remain stable and savings can be slowly built up again. The easing wage pressure indicates that the Federal Reserve (Fed) has made concrete progress in reducing aggregate demand and curbing inflationary pressure.
The current inflation data is encouraging, but Fed Chairman Jerome Powell emphasises that it is too early to declare victory in the fight against inflation. The question of whether the rate hike in July will be the last in the current cycle depends heavily on the data, as indicated by the central bank. So far, the Fed has kept inflation in check by acting quickly and decisively, without causing a major economic slowdown. The prospects for a gentle economic slowdown are becoming increasingly realistic.
The latest economic figures from China are rather modest. The strong growth in the first quarter could not be maintained in the following months. The service sector, which contributed to the recovery after the pandemic, is now showing signs of weakness. Investments and imports are declining, the property sector is hampering growth and international demand remains weak.
The fact that the early indicators for manufacturing industry are showing signs of stabilisation, albeit with a declining trend, could be seen as an initial positive signal. We interpret the statements made by political representatives after the Politburo meeting in July as a second encouraging sign. The importance of targeted policy measures to restore private sector confidence, boost investment and support the property sector was emphasised. It is now vital that those words be followed by concrete steps to ensure a sustainable and stable recovery.
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The information contained in this assessment is based on sources that the FI Group believes to be reliable. However, the FI Group accepts no liability for defects, including errors in the sources, printing errors or calculation errors or changed conditions.
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Marina Bay Financial Centre
018983 Singapore
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