In search of lost growth

Expected at the beginning of the year at 4.4%, global growth in 2022 is now expected at 3.3% by consensus of Bloomberg. However, it all started well. In December last year, the global economy ended the historic 2021 fiscal year with growth of 6.1%, thanks to recovery after Covid; favorable winds were announced for next year.

Clement Inbona, fund manager, and Olivier de Berrange, director of information technology

Clement of Inbon
Clement Inbon, fund manager

But for several months the car stopped. The Russian invasion of Ukraine initially damaged the confidence of households and businesses, while fueling the already steady inflationary surge. Then the health risk was revived from the ashes, breaking the shafts erected by Beijing and its policy of zero Covid. Its impact is also inflationary through the supply channel, the world’s factory is idle and adds sand to the mechanisms of production chains, which are already covered by a two-year failure. Its effects are also negative for China and, consequently, for global growth, holding back the domestic consumption of the second international economic power. Finally, in addition to these exogenous factors, inflation continues to spread a little wider each month, creating the risk of a self-sustaining price-wage spiral. This risk has inevitably provoked a backlash from major central banks, for which inflation control is a priority. As a direct result of this position, financial conditions have deteriorated significantly in recent months. It is now becoming more expensive for households to finance the purchase of real estate, for companies to finance their investment plans, and the burden of public debt is likely to increase gradually after years of decline.

Therefore, the economic and monetary situation, as well as its prospects, have continued to deteriorate since the beginning of the year, leading to a significant decline in key asset classes, including government bonds, which are not considered to be at risk of default. Although forecasts for the coming months are still gloomy, the forecast for global growth in 2022 is close to its long-term potential. The growth bends, but does not break.

If the worst is never determined, what can be the catalyst for economic recovery and the stock market?

Olivier de Berrange
Olivier de Berrange, CIO

Monetary policy remains a determining factor in valuing financial assets. Today it is seen as severely restrictive. Markets expect 11 rate increases of 0.25% this year for the Fed and 4 rate increases for the ECB. Bending, or even hoping to go, can be a catalyst for the stock market and economic recovery with weakening financial conditions. To do this, obviously, inflation should stabilize before it starts to fall. Although its level is high, inflation in the United States is beginning to shape this perspective. The resolution of the Russian-Ukrainian conflict could be a favorable factor for both inflation and confidence; today this remains an unlikely hypothesis, but it cannot be completely ruled out. Finally, with an increased risk of recession estimated at 30% in one year in the United States versus 15% at the beginning of the year, demand pressures may weaken and free up budgetary freedom for power. And this without the risk of maintaining an inflationary spiral.

“After the rain comes good weather“The question today is to try to find out when. The question, the answer to which, of course, is not very obvious, but which may be fruitful in the medium term for a wise investor. The best deals in the stock market are not reached when the horizon is clear, but, conversely, when it is particularly blocked.

The information provided is the result of an internal study conducted by the management team as part of its UCI management activities, and not a financial analysis in the sense of the situation.

This analysis is based on the best sources we have and publicly available information. They are in no way mandatory for La Financière de l’Echiquier and are not investment advice.