A changing view of the global economy

A changing view of the global economy

Since the beginning of the year, the global investment outlook has been developing based on what economists and investors have projected:

  • US economic data has begun to clearly show evidence of a slowdown;
  • The health of the European economy, although still deteriorating, is showing some signs of being better than many people had expected;
  • There seems to be a greater risk to the Japanese economy after the Bank of Japan in effect tightened monetary policy, leading to speculation on a rising yen and government bond yields;
  • A rising prospect is seen for the Chinese economy to recover strongly after the rapid reopening of the country; and
  • A strong divergence in the economic and investment perspectives of developed countries and emerging markets.

Looking at the United States, economic indicators have begun to slow down more markedly. Most recently, retail sales in December declined year-on-year for the second consecutive month, while signs of inflation are slowing more clearly, based on producer and consumer price indices.

In addition, regional economic surveys from the Federal Reserve, known as the Beige Book, clearly indicate that while price pressures on surveyed businesses are slowing down, sales are expected to grow very slowly in the future.

Although annualised GDP growth of 2.9% in the fourth quarter of 2022 topped forecasts, some internal components were worrisome. Private consumption expanded by just 2.1%, mainly of services, while goods consumption contracted. Net exports expanded but the figure was inflated by energy, especially liquefied natural gas shipments to Europe. Investment and government spending contracted. All this indicated that the pace of growth will decline as the year progresses.

However, the Fed has continued to raise interest rates despite weakening economic signs. Chairman Jerome Powell and other members continue to insist in public statements that rates will need to move higher in order to bring inflation under control.


Nevertheless, investors are still optimistic about investing in the US. A Chicago Fed study, for example, concludes that the economy will be able to achieve a "soft landing". In short, the study found that inflation could be reduced without unemployment increasing marginally. However, we view it differently. We believe that higher financial costs and diminishing excess savings will be important factors for the economy in the near future.

In Europe, meanwhile, we see better growth prospects. Major indicators such as German GDP, industrial production, and the latest composite purchasing managers index (PMI) did not shrink as expected. Headline inflation, at 9.2% in December, is down from its October peak of 10.6%. This is partly due to an unusually warm winter, which has eased fears of an energy shortage. Meanwhile, China's reopening has contributed to a better outlook for the European economy given that China is its biggest main trading partner.

However, we remain cautious about Europe. Keep in mind that the reopening of China could cause commodity prices to rise, renewing inflationary pressure and causing the European Central Bank to raise interest rates by more than expected.

In Japan, markets are still digesting the central bank's surprising move to change its yield curve control policy by raising the target for the 10-year government bond yield from 0.25% to 0.5%. This is an attempt to make bond yield movements more market-driven after being held down at ultra-low levels since 2016.

But many analysts see the move as a signal that the BoJ is preparing to abolish the policy sometime in the future, which would result in a de facto normalisation of monetary policy.

Traders have been testing the central bank's resolve by short-selling government bonds in the futures market, forcing the BoJ to buy huge amounts of bonds in an attempt to reduce yields. However, the central bank kept its nerve and at its Jan 18 meeting it signalled that it would stay the course. This caused short-sellers to face huge losses.

Nevertheless, we believe that in the future financial volatility will become more intense. This is because there will be more speculation on Japanese bonds, the yen and other Asian currencies. Eventually if the BoJ actually abolishes yield curve controls, Japanese bond yields will rise, which will increase the interest burden of the public and private sectors in Japan. This will affect the financial performance of businesses and the fiscal condition of the government.


Looking at China's re-globalisation through the abrupt cancellation of its zero-Covid policy, in the short term we are seeing a boom in "revenge travel" after nearly three years of lockdowns. The transport and tourism sectors in China and countries that are top destinations -- Thailand is a prime example -- will improve.

Other sectors of the economy are expected to recover as well, especially domestic spending and real estate. However, exports are likely to worsen in line with the weak global economy.

In our view, Chinese exports in 2023 may not grow at all, after 7% expansion in 2022, due to the global economic slowdown and risk of recession. On the other hand, we expect retail sales to expand by 7%, while investment may expand by 5%, helping to propel GDP growth of 5% growth this year. The figure could reach 6% or more if the expansion of the domestic economy is better than expected.

On the flip side, China's reopening has also boosted demand for commodities. China buys one-fifth of the world's oil, over 50% of the world's copper, nickel and zinc and 60% of the iron ore market. Higher demand for these commodities may affect inflation in the future.

Finally, the divergence in the growth outlook for developed and emerging markets is mainly due to the reopening of China and a slight recovery in commodity prices. This will support emerging markets that have greater economic links with China. In addition, the economic fundamentals of emerging markets are better than those of developed economies, and should continue to expand amid volatility this year.

In summary, the investment outlook in China, Europe and emerging markets appears to be improving, but the US and Japan appear to be riskier. Nevertheless, overall volatility will also be greater. Investors must closely monitor the situation.

Dr Piyasak Manason heads the Wealth Research Department at InnovestX Securities Co Ltd

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