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‘The risk is that central banks will do too much’, says Amundi’s Borowski



Didier Borowski at the Amundi Institute said that the growth-inflation relationship is changing in nature. Photo: Romain Gamba/Maison Moderne

Didier Borowski at the Amundi Institute said that the growth-inflation relationship is changing in nature. Photo: Romain Gamba/Maison Moderne

The inevitable weakening of global growth is a direct threat to corporate profits, according to the Amundi Institute’s Didier Borowski. Inevitably, return on capital will be lower in the coming months.

Didier Borowski is head of macro policy research at the Amundi Institute. Created last February, the institute aims to strengthen the advice, training and ongoing dialogue of Amundi’s clients--distributors, institutions and companies--around market developments, regardless of the assets that Amundi manages on their behalf.

The new division brings together Amundi’s economic and quantitative research, market strategy and asset allocation advisory activities.

Marc Fassone: How do you see the markets evolving in the coming months?

Didier Borowski: The current scenario is one of a fairly clear weakening of global growth. In Europe--including the UK--recession is here and threatens to be very severe in some countries, as it is aggravated by the energy crisis. In the United States, a clear slowdown in growth is also emerging. For 2023, the risk of a recession there is between 30% and 40%. This is very significant. And Chinese growth, held back by the property market correction and the zero covid policy--which is unlikely to be abandoned any time soon--will remain soft compared to its past performance of around 4.4%.

All in all, the slowdown in growth is affecting both advanced and emerging countries, and global growth is expected to be around 2.2% next year. This is half a point below the latest IMF forecasts and very low compared to recent decades! This carries the risk of a real recession in corporate margins and profits.

Until now, the resilience of corporate margins has been based on their pricing power, supported by post-covid tensions and excess savings that have allowed companies to pass on their rising costs to the final consumer. As we move into winter, we will find that real household incomes are falling, accumulated savings are being eroded and therefore purchasing power will fall, which will reduce the pricing power of companies.

In this environment, an adjustment of corporate margin expectations seems inevitable.

Will this looming recession have the advantage of bringing down inflation?

What we need to keep in mind is that in a stagflationary shock such as the one we are experiencing, it is inflation that weighs on growth, whether directly or indirectly due to the monetary tightening carried out by central banks to curb price increases. In this type of configuration, the small recessions that we anticipate will not be sufficient to curb price pressures. Inflation will remain very high next year and will only return very slowly to the targets of the central banks. Central banks will then no longer be able to be accommodating to accompany the recession.

We are not in the classic scenario where recession is accompanied by monetary easing. It is the opposite: the recession comes from inflation and the central banks have not finished raising their rates. This is what they say in their monetary communication.

However, the markets are anticipating an easing of monetary policies. Are they wrong?

There is a real misunderstanding among investors on this subject. Central banks can slow down the pace of rate hikes, but they will remain determined not to be accommodative.

The risk today is that central banks will do too much, that they will go too far in tightening after having gone too far in monetary easing. An overreaction by the Fed would inevitably weigh on the European economy.

In fact, the successive rate hikes by one central bank after another give the impression that they are chasing each other more than coordinating. Wouldn’t coordinating tightening policies be the solution to limit the risks of overreaction?

I think that central bankers talk to each other rather than coordinating explicitly. It is important for them to take into account the effect of monetary tightening in the rest of the world. If there is no explicit coordination, there is de facto coordination because each of the central banks can see that its counterparts are in the process of raising [rates] and that it must take into account the global looping effect of the monetary tightening in the other countries in its tightening.

It is important to understand that the growth-inflation relationship is changing in nature. We are entering a regime of potential growth weakened by the ageing of the population and the reduction in productivity gains and that is structurally more inflationary, with the energy transition and the re-regionalisation of certain production segments.

In order to revive growth, priority should be given to ambitious investment programmes--the energy transition comes to mind--which would require a better coordinated approach at European level, particularly in terms of budgetary policies.

In the current context of crisis, uncertainty and volatility, what advice are you giving clients?

First, we warn them that, on average, the coming decade will see lower returns on capital.

In the equity markets, the downward pressure on margins mentioned above is not--yet--reflected in prices. The recent rebound of the stock markets in Europe does not sufficiently take this into account. In our view, the market is quite complacent about the development of corporate profit margins, especially in Europe, but also to some extent in the US. Investors need to understand that the economic effects of the war in Ukraine and the energy crisis--whether on growth or on corporate profits--have not yet fully materialised.

Investors must therefore remain very vigilant: we believe it is premature to position oneself to seek to benefit from a very directional exposure of the stock markets. We must also remain extremely selective, as companies are navigating inflationary waters with varying degrees of success.

Read the original French version of this interview on the Paperjam site.

Updated: Didier Borowski’s job title changed between the interview and publication dates