“The economic backdrop appears more resilient than expected, but valuations are too stretched in some areas. A fundamental approach, with a global focus is key at this stage of the cycle.”
Markets are reassessing central bank (CB) policy paths amid slowing inflation and a potential economic slowdown but resilient historic data. The speed of disinflation, however, could be affected by tensions in the Red Sea, particularly for Europe. Thus, CBs job is getting difficult as they aim to maintain rates at a restrictive level for the right duration.
In terms of growth, we expect to see a prolonged slowdown in the US concentrated around mid-year. In Europe, we downgraded this year’s growth forecasts and we expect below-consensus inflation in China.
These changes do not affect our views on economic activity:
- Weakening US labour markets. Wage growth is falling and most of the strength in payrolls was in non-cyclical sectors (government, etc). This could affect consumption, which is strong for now.
- No recession call for EZ but risks are high. Weak government expenditure and constraints (Germany, France) likely to weigh on the economy but personal consumption and wage growth are positives for the region. The latter is also important for ECB decision-making.
- Slowing eco. growth and disinflation risks in China. Fiscal bazooka appears unlikely as govt. tries to deleverage. But piecemeal efforts to lift sentiment won’t have a long lasting effect, given the fundamental problems in real estate and consumption pressures.
- Geopolitics/politics gaining prominence. Half of global population will elect their leaders this year. Relations between the US, China, EU, EM will be affected by the choice of leaders/domestic rhetoric.
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