US soft landing, Europe holding up and China stalling

Anton Brender and Florence Pisani at Candriam do not see the US and European central banks taking a break from fighting inflation. Photo: Jan Hanrion / Maison Moderne (archives)

Anton Brender and Florence Pisani at Candriam do not see the US and European central banks taking a break from fighting inflation. Photo: Jan Hanrion / Maison Moderne (archives)

Weakening activity, but still high inflation: this is the 2023 scenario of Anton Brender and Florence Pisani, respectively chief economist and global head of economic research at the asset manager Candriam.

According to the IMF, global growth has fallen from 3.6% to 2.7%, growth in emerging countries from 2.2% to 1.1%, and growth in emerging countries from 4.6% to 3.7%.

At the same time, inflation remains high, but seems to have peaked at nearly 10%. However, despite the downturn that is beginning, economists do not expect central banks to end their monetary tightening policies.

From one region to another, the outlook is very different. This confirms the relevance of the decoupling theme.

We believe that China is at risk of entering a situation similar to that of Japan in the early 1990s.
Anton Brender

Anton Brenderchief economistCandriam

As far as China is concerned--“a large economy with a lot of uncertainties” said Brender--the economy does not seem likely to return to the historically high growth levels of recent years.

There are two main reasons for this: firstly, its zero covid policy has reduced growth. Even without these restrictions, growth is struggling. Retail sales are 13% below their trend level, disposable income is still 9% below its trend level and consumer confidence is in free fall. One statistic that Brender finds particularly worrying is the level of unemployment among 16-24 year olds, which is almost four times higher than the average for the working population (4.5%).

The second brake on Chinese growth is the bursting of the property bubble which, despite the support of the political authorities, is far from over. This has a direct negative effect on local government budgets.

“We believe that China is at risk of entering a situation similar to that of Japan in the early 1990s,” stated Brender, pointing to the excess savings and deflationary forces at work in China at the moment, which could accelerate the decline. And he doubts President Xi Jinping’s promise to double GDP per capita by 2035. “That would require an average annual GDP growth rate of about 4.7%. We’re a long way from that.”

US close to soft landing

For the US, Candriam reckons a soft landing is “the most likely scenario”.

Domestic demand is declining while price pressures are falling, the economist noted.

Consumption seems to be holding up. “Even with a weakened labour market, household disposable income will continue to grow. This should prevent consumption from contracting, provided that inflation decelerates. Business investment has slowed recently, but the technology part of investment should be resilient which will support investment.”

As for the labour market, it is in the process of normalisation.

“The need to replenish staff has continued to support employment growth despite the sharp slowdown in activity. Employment rates have almost returned to pre-pandemic levels. Although there are still vacancies at the lower end of the wage scale, the peak of the hiring boom has passed. The question now is whether turnover rates can normalise without a significant increase in the unemployment rate.

“While the pandemic has led to atypical turnover rates in the US labour market, the decline in the resignation rate indicates a deceleration in wage growth.”

But this has not led to a decline in core inflation, “for now.”

Brender reckoned that with increased multi-family housing construction likely to help ease rental market pressures and with supply chain tensions easing and petrol prices remaining stable, inflation should come in at 3% by 2023.

He expects growth of 0.7% in 2022 and 0.9% in 2023. He cannot rule out the risk of a recession due to the US Federal Reserve’s potentially poor expectations. In this case, growth for 2022 and 2023 would be respectively -0.8% and -0.2%. However, he does not expect the Fed to delay its monetary tightening policy and see its main policy rate peak at 5% by mid-2023.

In Europe, growth so far has been more resilient than feared.
Florence Pisani

Florence Pisaniglobal head of economic researchCandriam

“In Europe, growth has so far been more resilient than feared,” said Pisani. However, it is lagging behind the historical average by 1.9%. Some countries are lagging further behind than others, notably Spain and Germany.

Although the rebound in employment has been “spectacular”, Pisani noted a slight contraction in activity in both manufacturing and services. This contraction is reflected in all business surveys. Consumer confidence is depressed everywhere, “which is not a surprise given the spectacular increase in energy prices. An increase that puts significant pressure on household purchasing power.” High inflation will continue to erode purchasing power, she believes. This will have a negative effect on consumption and will underline the vulnerability of the euro zone to a rise in the price of natural gas.

It is the evolution of the price of natural gas that will determine the growth potential of the euro area. In a favourable scenario--a natural gas price that remains around €100 per MWh in 2023--growth next year will be around 0.5%. If the gas price were to approach €200 per MWh in 2023, the eurozone would be in recession with growth of -0.9%.

This will complicate the task of an European Central Bank caught between the risk of an imminent recession and a high level of inflation that it cannot ignore. Pisani sees the ECB continuing to normalise its key rates, with the main one reaching 3% at the beginning of the year before falling again to stabilise at 2.5% in 2025. “At the same time, the size of the balance sheet should be reduced considerably.” A scenario that a wage slippage, “in a context of limited potential growth in Europe”, could seize up.

Read the original French version of this article on the Paperjam site