07.06.2022 Finance Luxembourg

The global economy is showing initial signs of a slowdown

The global economy is showing initial signs of a slowdown,  impacted by rising long-term interest rates and a general rise in prices, write Guy Wagner and  his team in their latest monthly market report “Highlights”.

In the United States, weaker activity levels are most evident in the key sector of construction, following  the sharp rise in mortgage rates. Household consumption and business investment are nevertheless  continuing to grow at a fairly robust pace. “In Europe, the slowdown is primarily hitting the manufacturing  sector, which is particularly affected by supply chain disruption and soaring energy costs, while service  activities are benefiting from the gradual easing of Covid restrictions,” says Guy Wagner, Chief  Investment Officer (CIO) of the asset management company BLI – Banque de Luxembourg Investments.

Persistent inflation is raising fears of stagflation and even recession 

In China, the near-closure of entire metropolitan areas such as Shanghai has caused almost all activity  indices to collapse, jeopardising the official GDP growth target of 5.5% for the year as a whole. In Japan,  stagnant wage growth is eroding household purchasing power in real terms despite lower inflation than  in Europe and the US. “Globally, persistent inflation and the post-pandemic normalisation of public  spending are raising fears of stagflation and even recession,” adds the Luxembourgish economist.

First ECB rate hike likely in July

After the Federal Reserve raised its key interest rate by 50 basis points at the last Monetary Committee  meeting at the beginning of May, Fed Chair Jerome Powell made it clear during the month that the  process of reducing inflation to 2% may be painful but there is no other way to prevent inflation from  getting entrenched in the economy at high levels. In the eurozone, the ECB keeps saying that the asset  purchase programme will end at the beginning of the third quarter and that interest rates will start to be  raised at the Governing Council meeting on 21 July.

Long-term interest rates continue to rise in the eurozone 

In the United States, the first signs of inflation stabilising have, at least temporarily, halted the upward  movement in government bond yields. Overall, the ten-year reference rate declined in May. In the  eurozone, record inflation figures led to a further increase in long-term interest rates.

Low volatility on the stock markets 

Equity market volatility was contained in May, with most equity indices posting little change over the  month as a whole. In terms of sectors, energy stood out once again, gaining almost 10% over the month  and up 40% year-to-date. “Consumer stocks were particularly weak, with consumer discretionary trailing  the sector performance rankings since 1 January,” concludes Guy Wagner.

Source: Banque de Luxembourg