Asset Management: Monthly Macro Insights - September 2023

Over the past months, narratives dominated by central bank tightening producing an inevitable recession have faded from the scene. In fact, investors continue to wager that the resilience of the US and global expansions will persist. However, the economic outlook remains particularly uncertain amid further deterioration in business confidence.

China and Europe raise concerns – again…

The message from the Europe’s August surveys is clear: the expansion is at risk. In the UK, the PMI tumbled to 48.6 after a modest recovery over the past six months. In the Eurozone, the EC economic sentiment survey fell to 93.3, a level last seen in Q3-22 when an energy crunch was feared after Russia’s invasion of Ukraine, and during the Eurozone debt crisis in early 2010s. This downturn echoes the sharp fall in the composite PMI, down to 46.7 amid a sharp fall in services’ business confidence.

In China, recent developments increased concerns around potential spillover from housing weakness to the rest of the economy, although the signals from August’s PMIs were modestly constructive, sparkling optimism that the authorities’ stimulus measures announced in the past few weeks will inject confidence and dynamism into the Chinese economy.

… and divergences could soon fade

In contrast, the latest macroeconomic data in the US suggest the economy is robust. Still, business confidence fell in August to the lower range of the post-GFC period, suggesting that risks to the downside have increased.

Meanwhile, until recently, global economic activity has been marked by unusually large sectoral divergence with a weak manufacturing sector, yet robust activity in the services sector, supporting investors’ expectation for global growth to remain resilient. This divergence has somewhat receded in August, but for a mixed reason.

Overall, while investors remain sanguine regarding the economic outlook, the latest business confidence surveys do not corroborate this view.

Inflation likely to remain a constraint

Were downside risks to materialise and upset investors’ scenario of a resilient global economy, how quickly would central banks react to support the economy? The recent decline in inflation has been encouraging, mainly due to lower base effects in commodities. However, services price and wage inflation remain elevated and sticky. Central banks are thus likely to respond more slowly to an upturn in unemployment rates compared to recent history in order to preserve their credibility. Investors’ view of a relatively painless return of inflation rates to targets could prove highly uncertain.