Macroeconomic & Geopolitical

Slowly Slowing

April 2023 – 2 min read

One year since the inception of our Stagflation Shock scenario, the global economy continues to face elevated inflation and falling growth. Both are slowing, but they are slowing—slowly. And the descent has not been smooth.

China’s property sector crackdown cooled a key engine of growth, the Ukraine war threatened Europe’s recovery from the pandemic, and most recently, banking sector turmoil shocked U.S. markets. But recession forecasts continue to be postponed, even as an extremely aggressive global rate hiking cycle keeps investors on edge for what may break next.

Despite the turbulence, there are several atypical factors keeping the economy on course. Both U.S. and euro area households are supported by savings buffers built up during lockdowns. Labor markets, while starting to cool, remain strong, supporting nominal wage growth and spending. Companies were able to take advantage of low interest rates and successfully pass on higher prices to consumers. Also, order book backlogs remain a driver of industrial production. China’s current re-opening provides promise to its domestic economy and hope for international tourism destinations. Moreover, while PMIs have been cooling, the declines are overstated by easing supply chain delivery times which are a drag on headline indices.

The U.S. economy should slow substantially in the second half of the year, driven by the depletion of savings buffers, the tightening of credit conditions, the cooling of consumption, and firms’ margin pressures. Inflation will trend down, but the path will be bumpy, requiring additional Fed rate hikes this spring. Firms will respond to slower growth and higher funding costs by some increase in layoffs. Yet, a shortage of workers exacerbated by an ageing population points to a limited rise in unemployment. Many firms did not find enough workers to meet demand in the last three years. Any recession—this year or next—should be short and shallow.

In the euro area, growth and inflation have proved more robust than expected. A solid banking sector allowed the region to avoid severe contagion from stress across the Atlantic. Base effects should now help cool inflation, aided by a few more ECB rate hikes. Risks skew toward more, rather than fewer, hikes if the downward trend in inflation proves more elusive than expected.

In China, lockdowns plagued the economy for much longer than the rest of the world. Delayed re-opening will make it the only major economy to experience faster growth this year than last. However, the rebound will mostly rely on domestic consumption. The rest of the world will benefit from less uncertainty and more tourism.

We have upgraded our Stagflation Haze scenario from 60% to 70% as slowing growth and above-target inflation continue to define the outlook. The recent tightening in U.S. financial conditions has led us to downgrade our Boiling Over scenario, in which growth and inflation continue to come in hot and force central banks to deliver many more rate hikes, with odds down from 30% to 10%. Similar reasons have led us to boost the odds of our Steeper Slide scenario from 10% to 20%, in which the economy is not strong enough to withstand the aggressive tightening and slips into a more traditional recession this year.

While fears of a recession have been elevated over the past year, economies have shown resilience thus far. The path ahead is surely lower, but unless another exogenous event blows the global economy off course, the journey to lower inflation, via elevated policy rates and slowing growth, will still take time

Want to read the full article?

View PDF

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.