Economic review
In the financial markets, both equities and bonds achieved positive returns this year. Equities have performed best so far. Inflation eased in the past six months and interest rates increased further. The question remains what effect those interest rate hikes are going to have on the economy and financial markets. What do these developments mean for the returns realised for the Employee Pension? And what are the prospects for the rest of the year? This investment update reviews the past quarter and looks ahead.
From an economic point of view, weaker than expected
Economic institutes such as the IMF (International Monetary Fund) have revised their growth forecasts for the global economy downwards. In fact 2023 started less well economically than expected. This applies in any event to the European economy, which contracted by 0.1% in the first quarter of 2023. Consumer confidence has still not recovered from the blows of the COVID-19 pandemic, the Ukraine war, and the subsequent wave of inflation. The confidence indicators for European manufacturing had already fallen to recession levels, but producer confidence in services is now under pressure too. In the first half of 2023, economic growth rates for the US outperformed those of the eurozone. For the rest of the year, however, the outlook there is less favourable. US manufacturing in particular is experiencing difficulties. Any downturn in consumer spending is the main threat to the US economy in the months ahead. In Asia, the differences between the two economic powerhouses and neighbours, Japan and China, were notable. For a change, the Japanese economy surprised positively in this respect, while China lagged behind in relative terms.
Inflation has fallen
In both Europe and the US, inflation has fallen sharply in the recent period. In Europe, inflation was 5.5% in June compared with nearly 11% in October 2022. For the US, it was 4% in May compared with 9% in June last year. The main reason for the declining inflationary pressures is the fall in energy prices. But when we look only at core inflation, the picture is clearly different. Core inflation excludes volatile food and energy prices. Core inflation declined only slightly in the US and actually increased marginally in Europe. For both continents, core inflation is now slightly above 5%. Outside the eurozone and the US, the inflation picture is highly volatile. In the UK, inflation remains stubbornly high at almost 9%. In Japan, inflation is 3%. China, at 0.2%, is now balancing on the brink of deflation. For many other emerging markets too, the inflation wave now seems to be almost over.