La Française AM: difficult to imagine recession coming along in short term

May 12, 2023

Are fears of a recession truly realistic with growth forecasts have revised upwards significantly over the last three months?

‘Equity markets were flat over the course of the month, and the same goes for the main bond indexes, despite ongoing high levels of volatility. Looking beyond financial assets, all the uncertainties and risks we face appear to remain unchanged’, says François Rimeu, Senior Strategist, La Française AM, today. ‘What about the impact of the current banking crisis on credit? What will be the extent of the macro-economic slowdown caused by the monetary tightening set in motion by central banks? Are fears of a recession truly realistic, given the fact that growth forecasts have been revised upwards to such a significant extent over the last three months?

The past thirty days have nevertheless provided some additional clarity over trends for the coming months, along with some answers to the above questions.’

Concerns less acute

‘Macro-economic concerns are becoming less acute in both developed and emerging economies, with global PMIs at 53.4 and virtually no region below 50. The service industries are driving growth higher thanks to ongoing strong demand, especially across all areas of tourism. Excess savings from the massive stimulus packages of recent years are the reason behind this strong position, despite negative real wage inflation in most developed regions.

Over the next few months, the fall in inflation in the US will allow real wage inflation to move back into positive territory, which should allow consumer spending to hold up across the Atlantic. GDP figures published in late April seem to support this idea. Similarly, the reopening of China looks set to enable excess Chinese savings to play a positive role in the growth of service industries. With the service sectors accounting for around 70% of growth in developed economies, it is difficult to imagine a recession coming along in the short term, especially with labour markets still in good shape - something that has been proven in the latest data to emerge from the eurozone (unemployment rate at its lowest, employment rate rising, et cetera).’

Good news for Europe

‘Although the last few weeks have seen little movement in the prices of major financial assets, it is worth noting the sharp fall in commodity prices, especially oil. We believe weak Chinese demand, rising US production and increasing Russian oil production, despite cuts by OPEC+, to be the main reasons for low oil prices, but the general weakness in commodities is also a sign of a slowing economy. The relative weakness of the manufacturing sector is consistent with this scenario. In any case, these dips are good news for the growth of importing economies, not least in Europe, and they are equally positive indicators for the future course of inflation.’