Economic review
The year 2023 got off to a hopeful start with positive returns in all categories. This was a welcome change after the poor year for stocks in 2022. However, a new crisis presented itself before the winter, significantly increasing market volatility. How will this affect the fund returns in the Employee Pension? And what are the prospects for the coming year? This investment update reviews the past quarter and looks ahead.
Inflation still to high
The aftermath of the corona pandemic in combination with the war in Ukraine has caused a global rise in prices. Food and energy in particular have become much more expensive. But inflation in Europe has declined rapidly from over 10% to less than 7% today, due among other things to a mild winter and an accelerated transition to alternative energy sources. This is still well above the European Central Bank's target of 2%. However, core inflation (inflation excluding volatile food and energy prices) has remained high for longer than expected and has increased from below 2% in 2021 to 5.7% today. Core inflation is thus at its highest level in 25 years.
The central bank has raised interest rates in an attempt to curb inflation. This makes money 'more expensive', cooling the economy and dampening inflation. Higher interest rates also expose vulnerabilities in the financial system. We saw this happen during the credit crunch from 2007 to 2009. In March, a classic bank run put Silicon Valley Bank in the US and Credit Suisse in Switzerland, among others, in trouble, and caused turmoil in the financial markets.
The perfect storm
Low economic growth and a lurking 'banking crisis' are a dangerous cocktail. In the last quarter of 2022, we narrowly escaped a recession (two consecutive quarters of contraction). In that quarter, Europe achieved slight growth of 0.1%. The US economy grew 0.7% and China ended with 0% growth, which was better than the expected contraction. The effects of higher interest rates also became visible with the slowdown in economic growth, which had a negative impact on the real estate market.