Outlook 2023 – Update Q3
by
Felix Ronner
Geopolitical risks, the accompanying deglobalisation, persistent supply shortages and financial repression are all contributing to subdued economic growth. However, Europe’s economic growth should regain momentum in the course of the year.
The global economic outlook remains subdued in the third quarter. High levels of debt, ageing population and slow productivity progress still do not point to any major economic leaps on a global scale. Macroeconomic volatility and nominal growth have also remained higher for longer compared to the last decade. Nonetheless, inflation rates could fall significantly over the next few quarters. Given the uncertain investment conditions, investors are inevitably left feeling anxious. However, those with a steadfast look at the market will continue to find solid opportunities.
Service sector significantly stronger
The decline in the construction activity and the weak dynamics in industrial production are reflected in a restrained demand for raw materials. As a result, shortages of major commodities have reduced, leading to a lateral to downward trend in commodity prices. In contrast to the industrial sector, however, the situation in the service sectors has improved significantly. Employment in recent quarters has mostly increased despite the difficult situation in industry and real estate markets. These favourable labour market dynamics support wage growth and, in combination with falling inflation rates, household incomes.
Interest rate policy in the USA
Inflation is easing significantly in the USA due to the sharp drop in commodity prices and high base effects. Moreover, the Fed no longer necessarily has to raise interest rates further because monetary policy is already restrictive, and growth is gradually slowing down. However, due to the high labour market dynamics, the FOMC reserves the right to further interest rate hikes. With lower inflation and a subdued growth environment, the Fed should be able to lower interest rates slightly as of early 2024.
The Eurozone and its inflation
Due to low energy prices, headline inflation is falling on an absolute basis. However, core inflation is proving to be more stubborn than expected. In turn, labour market dynamics in the Eurozone are favourable, so that a larger part of the loss of purchasing power will be compensated for by higher wages. Thus, in contrast to 2022, a falling inflation rate combined with rising employment and stronger wage growth is now supporting purchasing power.
Market environment and trends
The situation remains volatile not only for the market, but also for shares, and there is no guarantee that they will not face setbacks. In the long term, however, the outlook remains fundamentally positive. Monetary tightening has led to valuations that are attractive from a long-term perspective. Yields on government bonds such as German Bonds or US Treasuries will also rise slightly on a multi-year basis.
The trend towards sustainable investments and ‘green finance’ will intensify across all asset classes in the coming years. Commodities – especially base metals – continue to face a temporarily difficult environment. Precious metals, however, continue to see favourable valuations. In addition, investors are increasingly focusing on the topic of ‘artificial intelligence’.
Are you interested in the complete Outlook 2023 – Update Q3? You can download it here.