The market had a terrible time last year. So far, 2023 looks different. Many indexes, including the Euro Stoxx600 index, Hong Kong's Hang Seng index and a broad index of emerging market stocks, had their best starts to the year in decades. America's S&P 500 rose 5%. The trade-weighted value of the dollar has fallen 7% since its peak in October, a sign that concerns about the global economy are receding. Bitcoin has also been doing well this year. Not too long ago, it felt as if we were in the grip of a global recession. Now, optimism is on the rise again.
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On January 18th, analysts at the bank JPMorgan Chase & Co., in a report on the euro zone, cheered, “Low gasoline prices, goodbye recession.'' Japanese lender Nomura has revised its UK recession forecast to “less severe” [than] What we originally expected. ” Another bank, Citigroup, said, “The probability of a full-blown global recession, with growth in many countries slowing in parallel, is now about 30%.” [in contrast with] We maintained a 50% rating until the second half of last year. ” The global economy is weaker than at any point since the 2020 lockdowns. But investors will eat anything.
Forecasters are in part based on real-time economic data. Despite calls for a global recession since at least February last year, when Russia invaded Ukraine, the economy has held up better than expected. Consider the OECD's weekly GDP estimates, a group of mostly rich countries accounting for about 60% of global output. Although not booming, few countries were struggling in mid-January (see Figure 1). The widely followed Purchasing Managers Index measure of global output rose slightly in January, consistent with GDP growth of about 2%.
Official numbers are still mixed. Recent statistics on US retail and industry were weaker than expected. In Japan, machinery orders were significantly lower than expected. However, consumer confidence across the OECD is rising after hitting a record low in the summer. Shortly after we went to press, officials were scheduled to release their first estimates for America's gross domestic product (GDP) in the fourth quarter of 2022. Most economists were expecting decent numbers, but the disruption caused by the pandemic will make these numbers less reliable than usual.
The labor market also appears to be holding up. Unemployment rates are rising in some wealthy countries such as Austria and Denmark, a clear sign that a recession is imminent. Hardly a day goes by without another big tech company announcing an employee layoff. However, technology accounts for a small share of total employment, and unemployment rates remain low in most countries. Fortunately, in areas where demand for labor is decreasing, employers are withdrawing job advertisements rather than laying off employees. We estimate that unfilled vacancies across the OECD have fallen by around 10% since hitting a record high of over 30 million early last year. Meanwhile, the number of people actually employed has fallen by less than 1% since its peak.
Investors are focused on the labor market, but what they're really concerned about right now is inflation. It is too early to know whether this threat has passed. In the rich world, “core” inflation, a measure of underlying pressures, remains at 5% to 6% year-on-year, well above what central banks consider comfortable. But the problem is no longer getting worse. In the United States, core inflation is declining, and the percentage of small businesses planning to raise prices is also decreasing. Another measure, developed by Cleveland Fed researchers, data firm Morning Consult, and Brandeis University's Raphael Schoenl, measures inflation expectations among the public in each country. It also appears to be declining (see graph 2).
Two factors explain why the global economy is performing better than expected: energy prices and private sector finances. Last year, fuel prices in the rich world rose by well over 20%, and by more than 60% in parts of Europe. Economists expect prices to remain high in 2023, hurting energy-intensive sectors such as heavy industry. they were wrong. Unseasonably warm weather has turned out to be unexpectedly flexible for businesses in dealing with high costs. Germany's industrial gas consumption was 27% lower than normal in November, but industrial production was down just 0.5% year-on-year. And over the Christmas period, natural gas prices in Europe halved to their pre-Russian invasion of Ukraine (see Exhibit 3).
The fiscal strength of the private sector has also made a difference. Our best guess is that households in G7 countries save about $3 trillion (or about 10% of annual consumer spending) in “excess” savings, far more than they would be expected to save in normal times. It means you are saving money. It was accumulated from 2020 to 2021 through a combination of pandemic stimulus and reduced spending. As a result, quarterly corporate profits in the U.S. are not falling off a cliff, although they do suggest a slowdown in spending. Consumers can weather higher prices and higher costs of credit. Meanwhile, companies are still sitting on huge amounts of cash. And very few companies currently face huge debt repayments. $600 billion of dollar-denominated corporate bonds will mature this year, and $900 billion will come due in 2025.
Can the data continue to outperform expectations? There is evidence, including a recent paper by bank Goldman Sachs, that the most significant effects of tight monetary policy occur after about nine months. Financial conditions began to seriously tighten nine months ago. If this theory holds, the economy could soon be on firmer footing, even if rising interest rates put pressure on inflation. China is also a reason to rejoice. The lifting of domestic COVID-19 restrictions slowed the economy in December as people hid from the virus, but the end of “zero coronavirus” will ultimately boost global demand for goods and services right.
However, pessimism remains strong. Central banks have a long way to go before they can be confident that inflation is under control, especially given the rise in commodity prices as China reopens. Indicators for America's future outlook are increasingly bleak. Additionally, an economy on the brink of recession is unpredictable. Once people lose their jobs and spending begins to be cut, it will be difficult to predict the depth of the recession. And a key lesson of recent years is that if something can go wrong, it often does. However, it's great to still have a glimmer of hope. ■
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