The economy and markets: key points to know
Key points to note
Expect normalization, not severe recession
Investors may be tempted to stock up on cushions as the debate heats up over whether the global economy will experience a hard or soft landing. But the data so far barely show a loss in altitude, let alone a sharp descent. Economic patterns have been abnormal for the past two years, but are slowly reverting to pre-pandemic form. Different countries and sectors are normalizing at different rates, creating market turbulence and exposing economic forecasts to ridicule. We expect a significant moderation in inflation over the next 18 months, as financial conditions tighten and economic growth slows in the world’s largest economies. But a mild recession is certainly not out of the question.
Job security is the new consumer confidence
Consumer spending is keeping the developed world growing, with many countries still benefiting from pandemic-era pent-up demand and excess savings. Jobs have returned quickly and wages are rising about as fast as prices. Yet consumers have almost never reported feeling so down in the dumps. Sentiment surveys are registering lower readings today than even in the midst of the 2008 financial crisis. But while consumers aren’t talking the talk, they are walking the walk: growing their spending well in excess of inflation (Figure 2). Rising net worth and job security are far more important predictors of consumer behavior than comments people are willing to share with survey takers.
Inflation is likely to moderate over the next 18 months.
The food and energy “tax” is worse for lower-income consumers
Geopolitical strife has contributed to persistent increases in energy and food costs. This affects every consumer at some level, but higher-income households and wealthier countries are relatively insulated from the direst consequences. Some emerging markets may soon be susceptible to acute food shortages and even social unrest unless supplies replenish and price increases relent. But even countries like the U.S. will have a narrower base of consumption growth this year as fewer households meaningfully increase their real spending.
It’s still all about central banks
Every economic data point is being refracted through the prism of how central banks will respond. This puts the labor market – a leading inflation indicator because wages play a big role in determining prices – at the center of our attention for the balance of 2022. News of job or pay freezes sounds bad, but they are necessary to slow the rapid pace of aggregate demand growth, rebalance the economy and allow policymakers to take their feet off the brakes. While a lot more central bank rate hikes lie ahead, a modest softening in employment data can help ensure they don’t smother the young expansion.
All market and economic data from Bloomberg, FactSet and Morningstar.
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