Inflation and growth are both expected to ease across 2023, according to Julius Baer’s Chief Economist David Kohl, who was addressing a Guernsey audience.
The high-inflation era may slowly be coming to an end globally, but economic growth is also going to slow down, as the impact of many governments’ monetary policy begins to be felt by economies.
Much of the global economy experienced cost-push inflation – increases in prices of goods and services caused by a rise in the cost of raw materials – across 2022, caused by spikes in energy prices especially, as a result of war in Europe. To combat this, many central banks raised interest rates, a tightened monetary policy stance which will lead to a growth slow down this year.
Mr Kohl (pictured) said that Julius Baer’s analysts are now seeing the differing economic results of different governments’ approaches to fighting inflation: “What we have observed is that it matters how countries dealt with cost-push inflation,” he said. “Each nation dealt with it differently and we’re now seeing the effects of that, represented in varying recovery rates and current 12-month inflation figures.
“In Spain, for example, inflation is around 4%. Their government took a fiscal policy approach and subsidised energy prices from the outset, which seems to have limited the inflationary effect of increased energy costs on other aspects of the economy. For example, a factory where the energy costs stay relatively stable doesn’t have to increase the cost of what it produces for consumers, so consumers are not hit as hard.”
Indications show, however, that inflation is starting to fall as 12-month figures move past the high-inflation period of early-2022. In the US, inflation is now at around 5%, down from a peak of around 10% last year. This cool down is being seen in economies around the world.
Slow down, not recession
While inflation is slowing, so is economic growth, as indicated by interest rates remaining relatively high and a decrease in consumer demand. However, Mr Kohl is not predicting a recession.
“Despite an undoubted slow down in economic growth, which is clearly happening and going to happen, it seems that a recession will be avoided. This is because the economy is actually in quite a resilient position, with many healthy balance sheets, a low level of investment imbalance, an increase in global trade, and demand for employment remaining high,” he said.
“All these factors indicate that there is a base level of stability which will insulate the economy from the worst effects of the slow down in growth. Trade between the US and China has never been at a higher level, and global trade, which is a big indicator of economic health, is now a multi-polar operation, with countries like Turkey and Russia in between the two traditional economic poles of the US and China.”
The arena for investors
Also speaking at the event was Craig Allen, Julius Baer’s Head of Investment Management Guernsey. Mr Allen delivered an update on what investors can expect throughout the rest of 2023.
2022 was a poor year for returns on both equities and bonds; it is unusual for both to perform poorly at the same time. But Mr Allen outlined that when this has happened historically, the following years tend to be characterised by a strong bounce back.
“2022 was the worst year on record for annual returns across the two types of holdings,” he said. “But history shows that it’s extremely unlikely that we’ll get two years in a row of poor performance like that. If we take 1931 as an example of a very bad year, a portfolio invested 60/40 in US equities and US bonds finished the first year down by 5.4%, but ended the second year up by 20.4%, so we have historically seen strong recoveries after poor years.”
Mr Allen said that corporate bonds represent a good option for risk-averse clients, but cautioned that any investment made should be in a diverse portfolio that is protected against shocks in any one area.
“The overall investment picture is a reasonable one,” he said. “Equities are probably around fair market value again, and corporate bonds are providing a reasonable return that would have been unimaginable even a few years ago. As ever, a bit of caution is required when comparing company benchmarks in equities. In the US much of the S&P 500 – an index tracking the stock market performance of the 500 largest listed companies in the US – is skewed by the performance of the eight big tech players, including Microsoft, Apple and Alphabet.”
Mr Kohl and Mr Allen were presenting at Julius Baer’s Guernsey Market Outlook event, hosted at the Old Government House Hotel on Wednesday 17 May 2023.