We are past peak inflation in major economies like the US and Europe, but questions remain regarding the speed of deceleration in inflation rates from here. We continue to expect slower growth in the global economy, but not an imminent recession. The odds for a downturn are lower in our estimation despite stalling growth in Europe and weakness in China.

In the US, consumption has been helping to drive growth; consumers continue to look healthy in aggregate, though delinquencies have been on the rise as of late.

The euro zone contracted marginally in the third quarter and its Purchasing Manager Index (PMI) levels fell short of other economies, though euro zone economic sentiment has improved marginally. We continue to expect stagnation in Europe over the coming quarters and see ongoing challenges related to energy.

We saw signs of stability in China with solid third-quarter gross domestic product (GDP) data. However, slippage in both manufacturing and services PMIs and weak domestic demand for credit suggest that the Chinese economy is not on stable footing yet despite ongoing stimulus efforts from policymakers. Property issues continue to act as a drag on growth.

RECESSION PICTURE IS UNCLEAR

• We currently project GDP growth (year average) of 2.4% for 2023, and 1.2% for 2024.
• Economic data is cooling after a super-strong third quarter. Chair Powell expressed that monetary policy is in a good place now and the lagged impact of tightening has not been fully realized. We believe that if core inflation heads toward 2.0%, then we could see the Fed begin to cut rates and fine tune policy.
• Canada’s economy narrowly dodged a technical recession with an upward revision to its second-quarter real GDP. However, we view the country’s negative third-quarter figure to be pointing to an economy struggling to grow. We believe that barring any economic surprises, recent data releases solidify the view that the Bank of Canada is likely done tightening.

CONSUMER RESILIENCE

• Consensus 2023 GDP estimates for Brazil and Mexico are above their Latin American peers and the consensus growth rate for the US. Consumers remain strong in both economies, which is a theme generally shared more broadly throughout the region.
• Notably, Chile finally had meaningful household consumption growth since a spending contraction that began in late 2021.
• Brazil posted a lower unemployment rate for October. Despite high interest rates, this large economy maintained and benefited from strong labor markets.
• We believe Panama will become a “fallen angel” given negative developments swirling around a major mining company and its contract with the government.
• The US significantly eased sanctions on Venezuela. Time will tell whether Venezuela adheres to the requirements of the move (i.e., fair elections). We do not expect a restructuring of Venezuela’s USD-debt anytime soon.

PERSISTENT ABOVE-TARGET INFLATION MAKES RATE CUT EXUBERANCE IRRATIONAL

• In our view, the economic outlook remains challenging, and inflation persistence will likely limit the scope for monetary response.
• The Bank of England (BoE) kept its Bank Rate at 5.25% at its November meeting. While it appears to be on hold, we believe there remains a persistent risk of more hikes.
• While there is good evidence that monetary control is having an impact, there are indications of continuing broad-based inflation.

STAGNANT GROWTH PERSISTS

• The euro area inflation rate declined to 2.4% year over year in November 2023—its lowest level since July 2021, and below market expectations.
• The growth outlook remains weak, and the energy shock remains a headwind. We remain of the view that a coordinated, investment-oriented fiscal response is needed.
• Wage and employment indicators remain concerning, which we believe means the European Central Bank will likely keep its guard up.

STABLE BUT UNDERWHELMING GROWTH

• A protracted downturn in the property market, plummeting export demand and subdued consumer spending are weighing on the economy’s recovery.
• The property sector is still not out of the woods; housing sales weakened again in November.
• The Central Economic Work Conference maintained a pro-growth stance but lacks details on further stimulus.

WAR AND RELATED TAIL RISKS CONTINUE

• Notwithstanding a brief pause in fighting, the war in Israel/Palestine continues, with myriad risks of escalation swirling, notably on the Israeli/Lebanese border and in the Red Sea. Domestic political dynamics are also a focus in Egypt, Jordan, Saudi Arabia and Israel.
• Consistent with our expectations, policy appears to be at an inflection point in South Africa. Its central bank’s recent decision to keep rates on hold was a unanimous one.
• Turkish policy continues to move in an incrementally tighter and more orthodox direction. Year-over-year headline inflation remains elevated, but there is growing optimism in the marketplace that recent policy shifts will have their desired impact. In our view, March 2024 local governmental elections will be an important test of authorities’ commitment to the recent turn in policy.

TIGHTEST LABOR MARKET IN DECADES

• Japan’s labor market is tighter than it has been in decades. With wage pressures mounting, we see a possibility of inflation becoming entrenched.
• The Bank of Japan (BoJ) changed its yield curve control (YCC) framework by turning the 1% upper bound to a reference rate—effectively widening the YCC band. In our view, the BoJ’s move signals that the end of YCC is a matter of when, not if.
• We continue to expect a solid recovery in Japan’s domestic demand, but are wary that external demand could drag on the economy.

SOME GREEN SHOOTS

• Asia’s technology exports are showing signs of recovery. However, this has yet to broaden, and overall exports have remained sluggish.
• India’s GDP growth surprised to the upside in the third quarter (+7.6% year over year), driven by a surge in investment spending.
• The Philippines’ third-quarter GDP report was a favorable surprise owing to a rebound in government spending. However, other growth components still appeared weak.

By The Loomis Sayles Macro Strategies Group

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