Global economic outlook: will it bend, or will it break?  

Will global economic growth bend or break? This was the focus of our recent webinar where I revealed my predictions that the global economy will not break but will bend.

I believe we will see a soft death of economic growth without sharp rises in unemployment and a deep recession or economic collapse.

However, that does not mean we won’t have a difficult period over the next few quarters in the developed world. 

Also speaking on our webinar, Rich Nuzum, our global chief investment strategist, who attended the recent World Economic Forum in Davos, said the mood there was cautiously optimistic. 

He said: “We went through the same six or seven known issues and risks starting with the Russia/Ukraine war, but we also had a relentless focus on ‘what are we missing here?’. Because the last time we were at Davos in person just before COVID-19 turned into a global pandemic, the mood there was pretty optimistic but that all changed weeks later.”

Business confidence surveys, which give us an early insight into what’s going on with GDP, suggest we are going through a relatively soft patch for global growth. But it won’t be anywhere near the levels we saw in 2008, 2009, and 2020. 

I told delegates how looking forward, we are expecting this slow economic growth to continue. At a rough approximation, as we move into next year, growth in the developed world and the US will be around zero and maybe a little better in the eurozone and a bit worse in the UK.

China’s recovery will support global growth

The one important exception is China where we are starting to see a sharp pickup in economic activity, primarily because it has ended its COVID-19 restrictions. 

We should expect to see a big pick-up in Chinese growth, which will be supported by its very weak starting point level of GDP, as well as monetary and fiscal stimulus and explicit support for the property sector. 

China’s recovery will support many of its trading partners around the world. In addition, Chinese tourists, which have been absent, are going to return. That will likely support overall global growth even while the developed world performs quite poorly. 

Nuzum pointed out that the US, UK and the EU, all run massive trade deficits with China, and we import a lot more than we export. 

“That means China coming back online helps reduce import prices, because those supply chains are freed up with less disruption. Meanwhile, our exports will go up, which creates additional GDP growth into an already overheated labour economy,” he said.  Because of the trade deficits, Nuzum expects the net impact to be helpful in terms of permitting monetary authorities to reign in inflation without triggering a serious recession. 

We have already seen notable improvements in inflation, with costs of shipping from Shanghai to the US or Europe falling as well as improvements across supply chains, which should help to bring down prices of goods. The retail price of gasoline in the US has fallen around 30% from its peak last summer. 

I pointed out that while we are expecting to see quite significant falls in inflation, it is too early to give the all-clear on inflation until wage growth slows. 

We are now seeing some of the lowest unemployment levels, and that is continuing to put upward pressure on wages even though the most recent data was slightly better. 

The problem is that until wages are back at normal increase levels of around 3% per year, central bankers are unlikely to feel that inflation will be able to stay at 2%. That is why I don’t think it will be until 2024 when central bankers will be able to give the all-clear on inflation and cut interest rates. 

At Mercer, we prefer growth, fixed income, and high yield such as emerging market debt, where valuations are attractive. If we are correct that this is a relatively benign environment, then we would expect downgrades and defaults to be relatively low. 

Nuzum said at Davos, fund managers were bullish on diversification and private markets, and particularly very bullish in the long term on clean tech and green tech. 

Clean and green tech

There is a lot of scepticism about being able to limit temperature rises to 1.5 degrees Celsius over pre-industrial levels.

Nuzum believes to make this make this happen, we need better clean and green technologies to make the cost advantage even bigger. He said: “We need massive infrastructure investments to help developing economies move away from carbon-based energy sources towards energy sources that are renewable but also cheaper, greener and more reliable.”

Traditional energy stocks have outperformed most cleantech and green tech investments on a relative basis in the short run because of the impact on traditional energy prices of the Russian invation, but on an absolute return basis, those investments are performing better than was generally expected because they have been competing with higher priced traditional energy.

All in all, the big story in 2023 will be about China’s reopening and the ripple effect it has across the rest of the world.