Outlook on the economy
Growth expactations
The economic headwind may gain strength, especially in the US and in the second half of this year. The macroeconomic figures do not yet reflect the impact of the recent banking crisis, but of course that could still change. Expectations for Europe are also not particularly high at 0.5% growth for the whole of 2023. For the Chinese economy, economists expect growth of 5.3% for all of 2023. Besides recent developments in the banking sector, long-standing (mainly geopolitical) risks also continue to shape the economic growth outlook. This applies, for example, to the further course of the war in Ukraine.
Curbing inflation versus financial stability
Eurozone core inflation is still well above the 2% target at 5.7%. There is also a visible shift from goods inflation to services inflation. This is worrying, as services inflation often lasts longer than goods inflation. Wage inflation has however so far not kept pace with the increase in consumer prices, but the question is whether this will continue. In addition, instability in the banking sector is causing an additional headache for the central banks. Until recently, financial markets assumed that the Fed (Federal Reserve, the central bank of the United States of America) and the European Central Bank (the ECB) would continue to raise interest rates in the second quarter of 2023 to dampen inflationary pressures. This expectation has now been revised to at most one rate hike in the coming period for the Fed and two for the ECB. Even more strikingly, the first interest rate cuts are already expected in the second half of 2023. This seems a reasonable assumption, especially if the economic situation deteriorates sharply in the coming period or if the banking crisis spreads further.
A dangerous phase for the global economy
Stubborn inflation, rising interest rates and instability in the banking sector make the global economy fragile. The economy is not doing well, and the short-term outlook is bleak. The combination of too high core inflation combined with lagging economic growth creates a risk of stagflation (a combination of economic stagnation and (high) inflation and/or unemployment). This could culminate in a recession.
Financial markets our view
Economists expect inflationary pressure in both the US and the eurozone to fall to a maximum of 3.5% by the end of 2023, still well above the 2% inflation target. For now, we are assuming a scenario with (slightly) higher capital market interest rates. This is not good for government bonds. In the Employee Pension, bonds are used to reduce the effect of interest rate movements just before retirement date. Volatility remains a major theme in the financial markets. This does not favour stocks or other more risky asset classes. With interest rates rising, we do not expect high returns in the near future.
Opportunities for forward-looking investing
We recognise the impact of geopolitical and cyclical (interest rate) effects, but at the same time believe they are temporary in nature. But how temporary? No one can predict this and we do not venture to 'time' these effects. We prefer stability by sticking to our investment strategy. Over the long term, we expect quality companies with strong sustainability credentials to outperform the index. We see this confirmed in our long-term track record.