Global economic projections have been rising across the board in the past quarter. However, expectations at the start of the year were probably too bearish, meaning some of the re-rating is a natural adjustment. Nonetheless, the underlying growth momentum has undoubtedly been stronger.
This upward revision to US growth suggests recession risk is lower, but it cannot be ruled out yet. The Euro Zone and the UK in particular remain susceptible to a weaker outturn later this year and into 2024. Almost all forward-looking indicators, as well as the likely policy trajectory, suggest that a reversion to low global growth (in line with long-term potential growth rates) is likely over the next few years.
Consumer and corporate behaviour are critical factors, with some divergence visible across the major economies.
A number of consumer demand factors will determine whether we end up with growth or a contraction:
- Nominal and real wage growth
- Job security and availability
- Savings levels
- The wealth impact of the housing market and wider asset performance, offset by higher debt financing costs.
And so based on an analysis of the main underlying consumer variables, our view is that:
- US and Canadian consumers are still in a relatively good position, with slower demand ahead but no signs of deterioration to suggest an outright contraction. As excess savings are exhausted, we will enter a more dangerous phase.
- The UK is at the bottom of the league, with a host of indicators pointing to a tougher environment ahead and a greater chance of contraction.
- In the Euro Zone, demand is easing but a contraction seems less likely.
In the corporate sector, we are focused on the following factors:
- Confidence across manufacturing and services
- Investment intentions and the likelihood of positive trends persisting
- Employment and new orders
- The cost structure and its impact on earnings (i.e. whether the ability to pass on costs is waning or not).
- Availability of loans and strength of balance sheets.
Based on an analysis of the main underlying variables, our view is that:
- US corporate sentiment is waning, with the risk of a shallow contraction that will feed into weaker consumer demand.
- The UK is again at the bottom of the league with indicators pointing to a tougher environment ahead and a greater chance of contraction.
- Corporate conditions in the Euro Zone are also experiencing broad-based weakness with the likelihood of a contraction
To find more about the latest house views from London & Capital’s Investment Desk, read the full AndPapers Q3 2023 here.