2023-07-18 00:00:29
A moderate recession would not be such bad news. It might not only have a favorable effect on the evolution of inflation, but also make the markets once once more sensitive to signals from the real economy.
After an already tumultuous first half, the global economy is showing increasing signs of slowing downespecially in Western countries where the effect of rising interest rates is beginning to be felt.
Whether in Europe or the United States, the economic outlook is not bright for the next few months. The tightening of credit conditions in a context of raising rates and withdrawing liquidity from the markets by central banks inevitably leads to a marked slowdown in growth.
In addition, companies will struggle to maintain their profit margins at the level. Households drew heavily on excess savings built up during the pandemic and demand is beginning to wane. This will limit companies’ ability to raise their prices further, while their costs continue to rise, particularly under the effect of the second round of inflation (salaries, services). Elements that analysts do not yet sufficiently take into account.
The phenomenon of the “cardboard box recession” reflects the sharp decline in demand for consumer goods, which contrasts with the increase in demand for services.
A cardboard box recession
Despite this slowdown, the contraction of the economy should be quite limited, both in terms of impact on GDP and duration. This is thanks to the large number of macroeconomic fundamentals which remain at correct levels. For example, the labor market remains very strong despite a wave of restructuring. Furthermore, the service sectors continues to grow, with the slowdown focusing on foreign trade and industry. The scenario of stagflation (characterized by the stagnation of the economy and sustained inflation) therefore remains the most probable for this second half of the year.
This signal divergence between the PMI indicators (Purchasing Managers Index) for manufacturing and services plunges us into a “cardboard box recession”. A model that economists have dubbed this, because there is a sharp drop in demand for cardboard boxes used for the transport of goods. This phenomenon reflects the sharp decline in demand for consumer goodswhich contrasts with the rise in demand for services (such as tourism).
The normalization of the monetary cycle means that macroeconomic indicators once once more become the benchmark for financial markets.
Normalization of the monetary cycle
The financial markets do not seem to be preparing for the approach of a recession. On the contrary, they rely on the moderating influence of the ECBmonetary stimuli having long propelled markets higher in the wake of the financial crisis that began in 2008. However, we might observe the opposite effect in all its intensity when the ECB drastically raised interest rates to fight inflation last year.
This situation leads to a normalization of the monetary cycle, a situation to which the markets have not been accustomed for 15 years. This has been illustrated twice this year, first with the crisis encountered by the Silicon Valley Bank in the United States in March, and shortly therefollowing, with the giant Swiss credit who also had to be saved. This briefly revived fears of a “2008 scenario” that would lead to a banking and financial crisis. The financial markets have therefore been able to observe that, this time central banks would not intervene to lower interest rates or support the banks. On the contrary, both the ECB and the Fed raised interest rates once more in March.
The normalization of the monetary cycle means that macroeconomic indicators once once more become the benchmark for financial marketsleaving aside the anticipation of central bank rate changes. So a mild recession isn’t such bad news. She might not only have a favorable effect on the evolution of inflation on both sides of the Atlantic, but perhaps more importantly, making financial markets sensitive once more to real economy signals.
Marc Daniels
Chief Investment Officer Beobank
1689647583
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