The global economy is experiencing a downturn, driven by increasing inflation expectations and geopolitical tensions, according to Michael Blümke, senior portfolio manager at Ethenea, an investment management company based in Munsbach. In his assessment, presented on 13 November 2023, Blümke pointed out the contrast in economic performances across regions: a robust US economy starkly differs from the eurozone’s disappointing figures and China’s weak growth, which is mainly due to its real estate crisis. However, China is showing signs of economic improvement, buoyed by the recent implementation of monetary and fiscal stimulus measures.
Blümke expressed concern over the eurozone’s economic performance, which remains below expectations. The private sector’s situation is particularly troubling, suggesting the possibility of a recession. In October, business climate indices and purchasing managers’ indices dropped to a three-year low, signalling a contraction in both manufacturing and service sectors. The third quarter saw tightened lending criteria and the labour market, while still solid, showed signs of weakening with a decrease in new job creation, said Blümke.
However, he noted that the consumer confidence in the eurozone has stabilised, albeit at a very low level, leading to a reduction in household spending and a consequent fall in retail sales. External factors such as weak foreign demand and geopolitical tensions continue to hinder industrial production, posing significant challenges for export-oriented economies like Germany and Italy. Despite a marked reduction in price pressures in October, core inflation remains high at 4.2% and there are concerns that headline inflation might rise again following increases in energy prices, argued Blümke.
According to Blümke, the European Central Bank faces the challenge of aggressively tackling inflation without causing a severe economic slowdown or, conversely, acting too late and risking stagflation. Currently, the ECB is expected to adopt a wait-and-see approach, mirroring the stance of the US Federal Reserve, predicted Blümke.
Should the [ECB’s] restrictive monetary policy triggers a recession, interest rates could be cut very quickly. However, this is not our baseline scenario at present
The US economy continues to demonstrate remarkable resilience, said Blümke. In the third quarter, it achieved an annualised growth rate of 4.9% compared to the previous quarter. Leading indicators in October for both manufacturing and service sectors pointed to a moderate expansion in the forthcoming months. The US labour market is gradually balancing out, bolstering robust consumer spending as evidenced by rising retail sales. This positive trend is supported by strong fiscal policies, healthy income growth and a solid labour market, which collectively offset concerns of an impending recession, reasoned Blümke.
However, the US is facing several challenges, including restrictive financing conditions, high wage agreements in the automotive sector, rising oil prices, the potential for a government shutdown in November and a significant increase in the budget deficit, which rose 23% year-on-year to $1.7trn.
October marked the third consecutive month of declining consumer confidence in the US, highlighted Blümke. The tightening of financial conditions is aiding the central bank’s efforts to combat inflation. However, the risks of overtightening are mounting, necessitating careful consideration against the backdrop of rising inflation expectations. Blümke assessed that, for now, a pause in the Federal Reserve’s interest rate policy is anticipated.
Despite ongoing challenges, China’s economy showed signs of improvement in the third quarter. In response to a struggling real estate sector, the people’s congress increased the budget deficit target from 3% to 3.8% of gross domestic product. This move, according to Blümke, along with calls for rapid issuance of special purpose bonds for infrastructure projects and the People’s Bank of China providing ample liquidity and encouraging bank lending to property developers, has begun to yield positive results. These targeted fiscal and monetary stimulus measures contributed to a 1.3% quarter-on-quarter GDP growth in the third quarter, remarked Blümke.
He added that there is an observable recovery in consumer-driven sectors in China, with retail sales and industrial production improving in September. However, the real estate sector continues to dampen overall investment. Leading economic indicators have returned to expansionary territory, indicating positive trends. Nevertheless, Blümke stated that China faces challenges from weak international demand and trade tensions with the US and Europe, which could continue to affect its economic growth.