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Global growth for 2022 was forecast to be 4.4% at the beginning of the year – it’s now expected at 3.3% according to the Bloomberg consensus. It all started so well. Last December, the global economy ended a historic 2021 with growth of 6.1% on the back of the post-COVID recovery, with momentum looking positive for the coming year.
But the last few months have thrown a spanner in the works. Firstly, the Russian invasion of Ukraine has dented the confidence of consumers and businesses alike, pouring oil on the flames of already well-established inflation. Next, the healthcare crisis has risen again from the ashes, laying waste to the zero-COVID policy of Beijing. This is having an inflationary impact on the supply side too as the world’s factory grinds to a halt, and throws sand in the wheels of production chains already log-jammed after two years of disruption. It is also negative for Chinese and therefore global growth, reining in domestic consumption in the world’s second-largest economy. And lastly, on top of these exogenous factors, inflation creep continues to spread a little further each month, raising the spectre of a self-sustaining wage-price spiral. Central banks have been swift to react – controlling inflation is one of their key priorities – with the direct consequence that financial conditions have tightened considerably in recent months. It’s now more expensive for households to finance their property acquisitions and for companies to finance their investment plans, whilst the weight of government debt risks gradually increasing after years of decline.
The prevailing and anticipated economic and monetary situation has thus deteriorated constantly since the start of the year, resulting in significant falls in all major asset classes, including supposedly zero-risk sovereign bonds. Although the outlook for the coming months remains bleak, expected global growth for 2022 is close to its long-term potential. Growth is buckling but not breaking.
It is never easy to be sure that the worst is over, but what could be the catalyst for an economic and stock-market recovery?
Monetary policy remains a key factor for the valuation of financial assets. Today it is seen as decidedly restrictive. Markets are anticipating 11 rate hikes of 0.25% each from the Fed this year and 4 rates rises from the ECB. Any inflection, or even the hope of inflection, could prove the catalyst for a rally in the stock market and the economy on the back of easing financial conditions. Of course, we would need to see inflation stabilise and then start to decline for this to happen. Although US inflation is at a high level, it is starting to show hints of this. An end to the Russian invasion of Ukraine could have a positive impact on inflation and on confidence; although this remains an unlikely scenario today, it should not be ruled out completely. Lastly, as the risk of recession rises – it is now estimated at 30% on a one-year horizon in the US, versus 15% at the start of the year – price pressure from demand could decline, leaving public authorities room for manoeuvre on fiscal issues without the risk of fuelling an inflationary spiral.
After the rain comes the sunshine – the question today is to figure out when the clouds will part. The answer is not clear, but the question could represent a medium-term opportunity for wise investors. On stock markets, the best opportunities emerge not in times of blue skies but when the outlook seems bleak.
Written on 20 May 2022 – Olivier de Berranger, CIO, LFDE