With the first half of 2023 over, it is evident that the world economy will grow around 2.5% this year, thanks to improving growth rates in Asia and a resilient economy in the U.S. The Euro area economies are in recession, which was confirmed by the back-to-back negative quarterly growth rates.
The second half of the year could be better than the first half if the deflationary trends, especially evident in producer prices, also translate into consumer prices.
We expect central banks in Europe, especially in the U.K., to continue to raise policy rates due to stubborn inflation. In contrast, the Fed’s recent decision to forego a rate hike in the U.S. suggests that the Fed is either already finished with rate hikes or has just one more left. In Europe, manufacturing surveys in all major economies indicate slower activity in the future as Germany’s manufacturing troubles impact its neighboring countries.
We remain underweight the international developed markets. Japan has been a solid outperformer, with corporate reforms attracting foreign capital. The diverging rate policies resulting from the declining June U.S. inflation readings could strengthen overseas currencies for the rest of the year.
We remain underweight emerging markets assets. Economically vulnerable countries like Turkey, Argentina, Nigeria, and Egypt are falling into a currency crisis spiral, where steep devaluations depress consumer confidence.
Chinese inflation figures are bucking the global trends, with annual consumer price inflation at 0% and producer inflation at -5.4%, the lowest in G20 countries. China’s trade surplus closed at a historic record last year and is on track for another record this year.
However, consensus estimates are overly optimistic about China’s economic outlook for 2023 at 5.5%. We expect a lower growth rate unless China unleashes fiscal and monetary stimulus. Recently, China reduced key borrowing rates for consumers, but the effects of this move are still to be seen in economic activity.
Chart shows Global equity Section: International developed markets remain less attractive but are improving Emerging markets are less attractive. Global fixed income Section: International developed markets – hedged are attractive International developed markets – unhedged remain less attractive but are improving Emerging markets sovereign – hard currency is less attractive Emerging markets corporates – hard currency is less attractive Emerging markets sovereign – local currency is less attractive
