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Investors are obsessed with global growth. Fears of recession in the US and in Europe are on the forefront of all discussions. As of now, it is clearly assumed that Europe will fall into a mild recession in the course of 2023, while the US will most likely escape. In both continents, there are sufficient factors providing resilience against a prolonged and area-wide recession. The main factors are a) in Europe there is a colossal household excess savings while in the US, consumers are highly agile and b) on both sides of the Atlantic there is a strong commitment to support consumers via fiscal policy.
Yet, the real risk is not Europe nor in the States, but in China. The state of the Chinese economy is not as brilliant as one can expect. As a result of some policy errors, the present downturn is not something cyclical but something that will last longer. In fact, China’s growth model has imploded and there are no alternatives on offer. That occurs on the commodity price shock, most visible in energy and a zero-covid strategy because of 50k ICU only, amongst others. Then, the economic downturn is coupled with a huge wealth destruction - property prices are adjusted to much lower levels and crypto investors take the hit from speculation. The break of confidence in the financial market crash, is perhaps caused by central banks’ tightening process.
The peak rate of inflation is close – but the road back will be long and painful. Headline inflation in the US – in terms of the CPI and the PCE deflator – has now, most likely peaked, but not so in Europe where the occurrence happens with more or less a three to four months-delay. The main reason for this top-out to take place are: a) energy prices have turned lower, b) commodity and food input prices have stabilized at higher levels but are now +/-18% below the peak level, and c) wage growth is materializing, but the pace of occurrence is slow.
The way forward with the rate of inflation: A durable inflation driver is labor cost. Research suggest that wage growth will be the major inflation driver for 2024 and 2025 – hence the rate of inflation will stay high until the full wage growth cycle is complete. A more important – and more durable – inflation driver, labor costs, is becoming increasingly powerful and will hinder disinflation. For the most part, our economists do not expect target consistent reading to be reached until 2024 or even 2025. This will be a long slog!
CB’s are moving away from the ultra-accommodative stances adopted first after the GFC and then augmented when the COVID-pandemic hit. That occurs at time when there is war on the Eastern front of Europe which imply economic sanctions against the aggressor which results in an idiosyncratic and local natural gas shortage, which in turn impacts the entire pan of economic activities. What are the Central Banks possible measures under these circumstances? None, because the pace of monetary tightening, which tended to accelerate, attempt to manage inflation rates not seen since the early 1980s in western advanced economies. Research suggests that this accelerated rate of active policy management will be in place for a prolonged period of time, whatever the cost will be!
The time when central banks approach was deemed to be in the vicinity of neutral, with rate hikes being accommodative has gone. After 35 years, or so, of decreasing interest rates, this stance is only natural and rational.
GCC countries are leading GDP statistics for the good. Higher oil and gas prices will further support GCC countries' economic growth during the rest of this year and into 2023, bolstering a steady recovery from the Covid-19 pandemic that began in the second half of last year.
Private sector activity in the GCC, in particular travel and hospitality, will be improving further after eliminating the Covid-19-related restrictions. Business activity in the non-oil private sector economies (mainly construction) of Saudi Arabia and the UAE, the two biggest Arab economies, The IMF projects that the UAE economy, the Arab's world's second largest, will grow 4.2 per cent this year, while Emirates NBD forecasts growth of 5.7 per cent and Abu Dhabi Commercial Bank estimates a 6 per cent expansion, supported by a sharp rise in the oil sector.
Inflation risks in the GCC will be cushioned by regional governments' successful supply chain management strategies. Furthermore, as exchange rates are pegged against the USD, the relative stability of the US economy will help offset the impact of high commodity prices on the domestic inflation.
Global trade defies the gloom! A slow down of Chinese economic activities impacted many others, especially economies in the South East Asian region. This obviously shows their clear dependence on China and the Chinese local market.
Abbreviatons:
QoQ = Quarter after Quarter SAAR = Seasonally Adjusted Annual Rate
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