05.12.2022 Finance economy International Trends

Global economy continues to show resilience despite slowdown

Although in a slowdown phase, the global economy continues to show resilience, write Guy Wagner and his team in their latest monthly market report “Highlights”.

“In the US, domestic consumption even appears to be picking up slightly as households continue to  draw on their excess savings from the pandemic. Business investment also remains robust thanks to  high profits which are only at the beginning of a likely weakening phase,” says Guy Wagner, Chief  Investment Officer (CIO) of the asset management company BLI – Banque de Luxembourg Investments. 

“In the euro area, government relief measures to reduce energy bills are supporting both private  consumption and industrial production.” In China, cyclical weakness continues, with much economic  activity still hamstrung by the zero-covid policy, which is preventing a significant improvement, despite  the introduction of a wide range of measures to address the persistent weakness in the property sector.  In Japan, third quarter GDP fell by 0.3% quarter-on-quarter, largely due to technical factors contributing  to a one-off increase in imports. Most components of GDP, such as domestic consumption, investment  spending and exports, rose. “Given the 12 to 18 months lag between monetary tightening and its impact  on real activity, the global slowdown is expected to deepen over the next year,” believes the  Luxembourgish economist.  

US inflation seems to be starting to ease  

In the US, inflation seems to be starting to ease after peaking at 9.1% in June. In the euro area, inflation  slowed for the first time after 16 consecutive months of increases. From October to November, headline  inflation fell from 10.6% to 10.0%.  

Increase of main policy rates expected in the US and in Europe 

In both the US and Europe, the US Federal Reserve and the European Central Bank have hinted at a  50 basis point increase in their main policy rate at their next meeting in mid-December. Such a move  would mark a reduction in the upward momentum from the 75 basis point increases previously made on  both sides of the Atlantic. Guy Wagner: “Despite the likely slowing of the upward pace, the end of the  central bank tightening cycle does not yet seem in sight.”

Easing in long term interest rates on bond markets 

The release of lower than expected US inflation triggered an easing in long term interest rates. Eurozone  bond markets followed their US counterparts, with the benchmark 10-year rate falling in Germany,  France, Italy and Spain.  

Equity markets continue to rebound 

In November, equity markets continued to rebound as falling inflation fuelled hopes of a moderation in  monetary tightening and hence a soft landing for the global economy. The MSCI All Country World Index  Net Total Return in euro terms rose by 3.4% during the month. The rise in the index in euro terms would  have been much greater had it not been held back by the rebound in the European currency. The MSCI  Emerging Markets index even gained 14.6% (in USD), “thanks to the rebound of Chinese equities from  their October slump and hopes of a gradual easing of China’s strict zero Covid policy.” At the sector  level, materials and industrials gained the most, while energy and healthcare were the worst performers. 

Source: BLI - Banque de Luxembourg Investments