LLast year Markets were having a terrible time. Until now 2023 looks different Many indices, including the Euro Stoxx 600, Hong Kong’s Hang Seng and a broad spectrum of emerging market equity prices, had their best start to the year in decades. Americas s&p 500 is up 5%. Since its peak in October, the dollar’s trade-weighted value is down 7%, a sign that fears about the global economy are easing. Bitcoin has also had a good year. Not long ago, it felt like a global recession was looming nailed. Now there is optimism again.
“Hello lower gas prices, goodbye recession,” analysts at bank JPMorgan Chase cheered in a Jan. 18 report on the euro zone. Bank Nomura has revised its forecast for Great Britain upcoming recession “to something less harmful [than] what we originally expected”. Citigroup, another bank, said that “the probability of a full-blown global recession, with growth slowing in many countries at once, is now about 30%. [in contrast with] the 50 percent estimate we kept for the second half of last year.” These are crumbs: The global economy is weaker than it has been since the 2020 lockdowns. But investors will eat it all.
Forecasters sometimes react to real-time economic data. Although there has been talk of a global recession since at least last February, when Russia invaded Ukraine, these data have held up better than expected. View a weekly estimate of bip from the OECD, a group of mostly rich countries that account for about 60% of global production. It’s hardly booming, but only a few countries were struggling in mid-January (see chart 1). Widely-watched “PMI” measures of global manufacturing edged up in January, in line with bip growth of about 2%.
The official figures remain mixed. The latest figures for US retail sales fell short of expectations. Meanwhile, machinery orders in Japan were far weaker than forecast. But after consumer confidence hit an all-time low over the summer OECD has risen. Officials will release their first estimate of America’s bip Growth in the fourth quarter of 2022 on January 26th. Most economists expect a decent figure, although pandemic-related disruptions mean these numbers are less reliable than normal.
The job markets also appear to be holding up. Unemployment is rising in some rich countries, including Austria and Denmark, a telltale sign that a recession is looming. Hardly a day goes by without another big tech company announcing that they are laying off employees. Still, technology accounts for only a small part of total employment, and unemployment remains low in most countries. Fortunately employers around OECD largely express their declining demand for labor by withdrawing job advertisements rather than firing people. We estimate that since hitting an all-time high of over 30 million early last year, the number of job vacancies has fallen by about 10%. The number of people who are actually employed has fallen by less than 1% from its peak.
Investors are watching labor markets, but what’s really on their minds right now is inflation. It’s too early to know if the threat is over. In the rich world, “core” inflation, a measure of underlying pressures, is still at 5-6% yoy, far higher than central banks would like. However, the problem doesn’t get any worse. In America, core inflation is falling, as is the proportion of small businesses planning to raise prices. Another dataset from researchers at the Federal Reserve Bank of Cleveland, Morning Consult, a data company, and Raphael Schoenle of Brandeis University is a cross-country measure of public inflation expectations. It also appears to be falling (see chart 2).
Two factors explain why the global economy is holding up: energy prices and private finances. Over the past year, fuel costs have risen by well over 20% in rich countries – and by 60% or more in parts of Europe. Economists expected prices to remain elevated in 2023, crushing energy-intensive sectors like heavy industry. They were wrong on both counts. Aided by unseasonably warm weather, companies have shown unexpected flexibility when it comes to dealing with high costs. German industrial gas consumption in November was 27% below normal, but industrial production was only 0.5% below yoy. And over the holiday season, European natural gas prices have fallen by half to levels last seen before Russia invaded Ukraine (see Chart 3).
The strength of private sector finances has also made a difference. Our best guess is that families in the G7 are still sitting on “excess” savings – that is, those in excess of what one would expect in normal times – of about 3 trillion and less spending in 2020-21. As a result, their spending is resilient today. They can survive higher prices and higher borrowing costs. Meanwhile, the companies are still sitting on large mountains of money. And few are facing large debt repayments right now: $600 billion in dollar-denominated corporate debt is due this year, compared to $900 billion due in 2025.
Can the data continue to beat expectations? There is some evidence, including a recent paper from Goldman Sachs, that the biggest drag on economic growth from tighter monetary policy comes after about nine months. Global financial conditions began to tighten in earnest about nine months ago. If the theory is correct, the economy could soon be back on firmer footing, even as higher interest rates begin to eat away at inflation. China is another reason to be optimistic. Although the lifting of domestic Covid-19 restrictions slowed the economy in December as people hid from the virus, the abandonment of ‘zero Covid’ will ultimately boost demand for goods and services worldwide. Forecasters also expect warm weather to persist across much of Europe.
However, the bearish case remains strong. Central banks still have a long way to go before they can be confident that inflation is under control, especially with China’s reopening pushing commodity prices higher. Furthermore, an economy on the brink of recession is unpredictable. Once people start losing their jobs and cutting back on spending, it becomes impossible to predict the depth of a downturn. And a key lesson from the last few years is that when something can go wrong, it often does. But it’s nice to still have a glimmer of hope. ■
