The economies of developed market countries have been, so far, resilient against the backdrop of higher interest rates, inflation, and supply chain issues. In fact, on the investor’s side, a change of mind has occurred. While in the past there were concerns of recessions, there are now fears that the economy may overheat at any time soon. The job market, which is strongly powering ahead, is a good gauge of this concern.
There is a mixed bag in the economies from rising interest rates. Inflation hasn’t come under control yet—we expect the latter to stay high for longer as wage inflation has not yet been accounted for. Up to now, there were two phases of inflation: a) higher input prices such as for oil, gas, and food, and b) services became more expensive. In some sectors, such as energy, mining, and banks. performance was predominantly good because of higher inflation. On the other hand, sectors such as mid-sector discretionary goods, utilities, and industrials were affected most negatively because of higher input prices.
Of course, there some external and unique elements to account for:
- The hang-over from COVID such as subsidies that continue to bolster household spending,
- The market is more resilient than in past end-cycles. Again, here we have the unique element of people quitting their job activities which adds an important distortion to the labor market and which is highly difficult to consider by any model.
- In the last six months or so, energy prices have dropped significantly, and consumers saw some considerable improvement fin their budgets which boosted spending for discretionary spending just as monetary tightening began. This again is a kind of exceptional event.
What is expected next?
The global economic slowdown should become more apparent. EPS and profit warning (profit recession) is expected to accelerate. In this context, and with economic output still high levels for now, the job market is expected to slowdown with weaker growth to follow through 2023 and 2024. In this environment, energy prices are unlikely to increase much, inflation will finally slow down, and central banks pace to action monetary easing is likely to be on a jet-lag too. Finally, interest rates should move towards the longer-term averages which is an indicator that growth is expected to be sluggish for the quarters ahead.