Asset Management: Monthly Macro Insights - August 2023

After some resilience in early 2023, the economic outlook remains particularly uncertain amid further deterioration in business confidence. Yet, investors continue to foresee a soft landing.

Murky economic outlook

Earlier this year, global economic activity has been marked by unusually large sectoral divergence. If this trend were to persist, expectation for global growth to remain resilient in the remainder of 2023 could be frustrated.

In China, business confidence suggests economic momentum stayed weak at the start of H2-2023 after a disappointing second quarter. The authorities have made several pledges in recent weeks to revive the economy and boost business confidence, buoying financial markets. Yet, the effectiveness of these measures to boost economic activity is uncertain.

Pausing for different reasons

Many central banks have hiked interest rates lately and opted to adopt a data dependant approach. While the case for an ECB pause is linked to growth concerns, a Fed pause in September seems to be based on inflation optimism.

In the Eurozone, Germany’s GDP stagnated, and Italy’s economy unexpectedly fell -0.3% q/q in Q2-23. The contraction provides further evidence that the ECB’s monetary tightening is biting. Looking ahead, investors’ expectations of a rebound in Eurozone economic activity in the coming months are also facing the reality of falling confidence indices.

Correspondingly, risks to the economic outlook are increasingly skewed to the downside. That said, core inflation was unchanged at 5.5% in July. The ECB is thus facing a complex dilemma and might be compelled to keep a hawkish tone.

Meanwhile, US GDP economic activity remained moderate in Q2-23. Consumer spending was somewhat robust thanks essentially to services, but the resilience is facing high uncertainty.

On the inflation front, the June CPI and PCE reports were welcomed, although one should note one month does not make a trend and core measures remain sticky. Different measures of workers compensation have shown wage growth eased very gradually from record-high levels. However, a substantial gap in the workforce remains and could linger if demand for workers stays high.

Looking ahead, the Fed will be assessing the need for further tightening that may be appropriate and, in that regard, the imbalance in the labour market remains paramount in the conduct of monetary policy. The slowdown in wages is a positive sign for the Fed, although it stays incompatible with a swift return of inflation to target. In fact, it remains to be seen whether inflation can drift all the way to 2% without a substantial weakening in the labour market.

Completed writing on 3 August 2023