The International Monetary Fund’s 2023 global economic growth outlook of 2.8% faces downgrade risks, mainly emanating from the U.S. Recent banking troubles in the U.S. will have some reverberations in global markets and the global economic outlook. It is too early to tell the magnitude of the economic impact as the authorities are feverishly working to manage possible contagion.
The relatively hawkish European Central Bank is expected to raise policy rates during the summer months, due to stubborn inflation in Europe, while the Fed is expected to stay on hold. Europe will again need to fill its gas storage as much as possible this summer, but this time with much less gas from Russia, as well as potentially having to compete with China’s renewed energy demand. Recession expectations in Europe, albeit lower than last month, remain elevated due to manufacturing contracting significantly in Germany, Europe’s largest economy. We still expect that these uncertainties could tip European economies into recession.
We remain underweight in the international developed markets (IDM) but recognize the solid momentum in overseas currencies and equity markets. The next two monthly inflation readings in the U.S. could set the tone for currencies for the rest of the year.
In China, the newly appointed central bank governors and securities regulators signify a tighter grip on central decision-making. Chinese inflation figures are bucking the global trends, with producer price inflation at -3.6% and consumer inflation at 0.1%, 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.
We remain underweight emerging markets assets. Consensus assumes that China could deliver 5.6% growth rates in 2023 with the help of reopening efforts. We expect a lower growth rate unless China unleashes fiscal and monetary stimulus.
Tactical outlook (3-12 months)
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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 less attractive International developed markets – unhedged remain less attractive but are improving Emerging markets sovereign – hard currency is neutral Emerging markets corporates – hard currency is neutral Emerging markets sovereign – local currency is less attractive
