Slow food for thought
Insights and research on global events shaping the markets
At the end of an eventful year, the Swiss economy has lived up to its reputation as the European continent's pole of stability in 2023. When the rest of Europe went into recession, Switzerland saw only a moderate slowdown in activity. While inflation in the eurozone reached levels not seen for decades, the pace of price increases in the Swiss Confederation remained largely contained.
As we look toward 2023, the global economic environment continues to be shaped by the aftermath of the pandemic shock. We are still in the midst of a peculiar economic cycle that started with a sudden stop in global economic activity and an unprecedented support from governments and central banks. Inﬂation has surged this year to levels not seen in decades and has prompted central banks to raise rates in a hurry. Rising prices and higher rates are expected to weigh on global economic activity next year, prompting global growth to cool down further. Some factors support the view that this slowdown will remain contained and that an economic “soft landing” is the most likely scenario after the wild ride of the past three years. However, risks remain clearly tilted to the downside on the economic front for the year to come.
The discovery of the new Omicron variant has brought back fears and concerns around the global economic outlook, in an already sensitive context of surging Covid cases and rising restrictions across Europe. In order to gauge the economic impact of this new variant, two key questions remain unanswered, at least for now: Will existing vaccines provide a decent level of protection against the Omicron variant? Compared to existing variants, does this new one cause similar, more or fewer severe conditions, hospitalization and deaths?
18 months into the Covid pandemic, the world economy has experienced its shortest yet deepest recession ever, followed by one of the strongest recoveries on record, thanks to historic levels of government and central bank support. The magnitude of the shock, and the uncertainties around its impact on the economic outlook, meant financial markets oscillated between despair and hope, with occasional spikes in both directions. Europe’s summer marks another step in this atypical economic cycle with a transition from recovery to an environment of steadier growth.
The ongoing global recovery is very strong. World economic growth this year will be the highest in at least four decades as economies recover from 2020’s huge shock. Evidence of this spectacular recovery already widespread, especially in the United States, which is once again leading the global economy thanks to fiscal stimulus and a swift and successful vaccine campaign. The reopening of business activity has unleashed record pent-up demand. Europe is also about to experience a similar boost as it gradually lifts pandemic- related restrictions.
The global economic recovery continued through March with more evidence of improving industrial activity and commerce. US retail sales recorded their second-largest rise in since 1992, and manufacturing expanded by an almost four-decade high. Positive economic developments saw markets pricing in a return of inflation. Even the external shock of Archegos Capital Management’s stock sell-off late in the month was most notable in its failure to disrupt markets structurally. Rising US treasury yields, reflecting expectations that interest rates would respond to the accelerating recovery, were contained by the Federal Reserve’s communications. The US central bank reminded investors that it is focused on the real economy, jobless rates and average inflation targeting and sees no reason to raise rates before 2023.
When fear grips investors, the market can appear to be full of phantoms and poltergeists. As an explosive 2021 reaches another volatile cross-roads, investors have a lot to contend with – spiking treasury yields, ructions in the tech market, and a yet unresolved global pandemic. In times of upheaval or economic disruption, investors, directed by deep-wired psychological conditioning, are often led to exaggerate and extrapolate trends for future events. On the current extreme pole of anxiety, some investors are concerned newly elected President Biden’s fiscal largess could unleash the dreaded return of proper inflation in the West’s foremost economic stronghold.
Staggering spikes in Covid-19 cases, all too expected Brexit disruptions and shocking anti-democratic developments in the US kicked off 2021 with a bang. From a different vantage point, however, the beginning of 2021 can be seen as positive. Vaccines roll-outs are bringing us closer to the end of the pandemic, uncertainty around Brexit is over and a Democrat majority in the US Senate will enable enhanced fiscal support.
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