The newly-initiated stock market rally continues after almost two months of declines. But some less-good-than-expected economic data has tempered recent market optimism.
For many countries, it now looks as though a recession is an inevitability, and the World Bank has lowered its global growth forecast to 2.9% this year, down from 5.7% in 2021. Growth looks set to hover around that figure throughout 2023 and 2024. Inflation, meanwhile, is likely to remain above the target for most economies.
War in Ukraine, lockdowns in China, supply challenges and the risk of stagflation are all combining to stifle economic growth. Consumers, meanwhile, are grappling with significant rises in household living costs.
The impact that Putin’s incursion is having on food security, energy and finance is being felt globally as sanctions start to bite on both sides – the US and its allies, and Russia.
In the UK, clear parallels can be drawn between the present-day and the 1970s: rampant inflation and hawkish rhetoric from the central banks are taking their toll. And the parallels do not end there: thousands of railway workers have just announced strike action throughout June over pay and job security. British motorists, meanwhile, have just seen the biggest one-day jump in fuel prices in 17 years, and the cost of filling an average family car is now more than £100.
All of this comes hot on the heels of the Prime Minister narrowly surviving a vote of no-confidence in the Commons. Under current rules, his leadership cannot be challenged again for a year. But he has been left severely weakened and is haemorrhaging support from his party.
One bright light for the UK and the Commonwealth was the Queen’s Platinum Jubilee, celebrated with appropriate pomp and circumstance over four days last week. Although Her Majesty could not attend every one of the events in person, many senior members of the Royal Family were there to represent her.
Germany’s inflation data has proven worse than expected, triggering a sell-off in the benchmark 10-year Bund. As is the case in regions throughout the world, inflation remains stubbornly high across the Eurozone.
It hit a record 8.1% in May – more than four times the European Central Bank’s target rate of 2.0%. A significant proportion of this increase can be attributed to higher food and energy costs.
Many have been calling for the European Central Bank to raise interest rates sooner rather than later in a bid to tackle this, and on Thursday it finally capitulated. The ECB has just confirmed that it intends to hike interest rates by 25 basis points at its July meeting, with a further hike expected in September. It also significantly raised its inflation target for the Eurozone, while downgrading growth predictions.
Other factors are keeping the market for gas and oil prices highly volatile in Europe. These include uncertainty over Europe’s reliance on Russian oil and deadlines for scaling down Russia’s contribution to its power mix. Meanwhile, India is accelerating its purchases of discounted Russian oil, just as the West is accelerating its energy-related sanctions on Moscow. All of this makes it very difficult to predict the future direction of energy prices.
In several other countries, harvests have been hit by drought and flooding, giving rise to concerns over food shortages. The US wheat harvest yield, for example, is expected to be around 25% lower than normal. And given that the US is the fourth-largest wheat exporter in the world, this could have far-reaching consequences.
History suggests that implementing measures to tame inflation will cause the economy to shrink. The increase in interest rates this year will be greater than over seven economic cycles. In six of these cycles since 1955, a recession has followed within 18 months.
Although a recession is indeed highly likely, it should be a relatively shallow one. Even with sharp increases in household expenditure, many consumers are still flush with cash savings accumulated during the lockdowns which might help them withstand some of their rising costs.
And although rising inflation does indeed make for a somewhat gloomy outlook, a significant number of corporations are still generating profits (a positive sign), while employment and the housing market remain relatively robust.
Both corporations and consumers have manifestly experienced a period of wealth retracement. Uncertainties over rising inflation, monetary tightening and the outcome of the war in Europe are all factors in the overall equation.
Elevated household costs and significantly higher levels of poverty will exacerbate global inequality at a time when climate change threatens our very existence.
Nevertheless, even in these bleak times, there is enough positive data floating around to help us think about better times ahead. It is not just recent global factors that have triggered the decline of the stock market over the last few weeks: extraordinary events have been happening for the past decade.
It is, however, true that supply chain bottlenecks and war in Europe have released the genie from the bottle as far as inflation is concerned, and the central bankers are stuck between a rock and a hard place when it comes to quantitative tightening. Should they attempt to curb inflation by hiking rates up aggressively and threatening growth? Or should they remain tepid with monetary policy tightening, allowing inflation to peak and then fall naturally?
Unfortunately, countless stocks have suffered an aggressive fall in share price, leading to a period of asset repricing; and while it is likely that we will see further weakness in global equity markets over the summer months, pockets of value are beginning to manifest themselves.
A number of challenges lie ahead, and we will still have to navigate some fairly choppy waters. But a well-thought-out plan that focuses on the key investment criteria that will hopefully characterise the coming years should still present us with some rewarding outcomes.
