Investing.com - European markets in the green at mid-session on Monday - {Ibex 35, CAC 40, DAX... - with investors keeping a close eye on the experts' outlook for the second half of 2023. "Resilient labour markets and falling energy prices in the first half of 2023 look set to give way to a more uncertain growth environment as the effects of tighter monetary policy and stresses in the banking sector take hold," warns Tiffany (NYSE:TIF) Wilding, economist at PIMCO.
"Unlike in 2022, when inflation was uniformly sticky and surprised to the upside, inflation is starting to diverge across countries and sectors. And while some central banks are seeing initial progress towards lower inflation, central bankers in general still face a difficult balancing act," Wilding adds.
Without fiscal policy ready to save the day, we see a more uncertain growth environment with downside risks building on the cyclical horizon. We continue to believe that a US recession and rising unemployment will eventually trigger a central bank policy normalisation cycle, but not before developed market central banks, including the US Federal Reserve, undertake a few more hikes in the coming months," she says.
Once the first half of the year's upturn has largely petered out, what lies ahead is a more uncertain growth environment, with increasing downside risks. There are several reasons for this, the PIMCO analyst elaborates:
Developed market central banks appear to be offsetting some of the positive momentum of the first half of the year by raising policy rates somewhat more than expected. In the US, we believe that the Federal Reserve will raise interest rates again in July and is likely to do so later in the year. In early June, the Reserve Bank of Australia and the Bank of Canada restated their hiking cycles, arguing that inflation remains too high and policy is not tight enough. Last week, accelerating inflation in the UK prompted the Bank of England to hike by 50 basis points and signal that more hikes are on the horizon, despite signs of a slowdown in the labour market. Finally, despite weak manufacturing activity, tight labour markets and accelerating unit labour cost inflation in the euro area pose challenges for the European Central Bank.
These additional central bank hikes come against a backdrop of already tight financial conditions, tightening bank credit conditions and declining loan demand, all of which are likely to slow economic and labour market activity with a lag. The United States, with its fragile regional banking sector, appears particularly vulnerable.
China had very strong growth in the first quarter, but its post-COVID momentum already seems to be fading. The loss of momentum in consumption growth, amid an already weak export sector and a fragile housing market, argues for more government support. However, any near-term credit or fiscal easing in China is likely to be selective and modest.
"Diverging inflationary trends across product subgroups within regional consumer price indices (CPIs) are likely to continue, in contrast to 2022, when inflation surprised relentlessly in one direction across products and regions. Barring a further rise in geopolitical tensions, headline inflation is likely to continue to moderate across regions as last year's sharp energy price appreciation fades from the year-on-year calculation," Wilding continues.
"Goods inflation is also expected to moderate as production bottlenecks disappear, the supply of goods increases and input costs moderate. However, we expect services and wage inflation to moderate more slowly, and would require weaker labour markets to achieve price stability. This is consistent with our view that US inflation would move from 9% to 4% relatively quickly, while a return of inflation to the Fed's 2% target would require more time and slower growth. Other developed markets are likely to face similar challenges in controlling inflation," she adds.
Finally, the PIMCO economist points out that China seems to have the opposite problem. "Inflation is falling, and some of the disinflation or deflation is likely to be exported to the rest of the world via a weaker Chinese currency. With global demand for goods contracting, China may also try to stabilise export growth by increasing the supply of cheaper Chinese goods on world markets," he notes.
"All this is happening while fiscal policy fatigue continues to set in. Barring more severe recessions around the world, we do not expect much support from fiscal policy over the cyclical horizon. In this situation, we focus on the high quality parts of the bond market, where starting yields are high. In our view, this can help investors build resilient portfolios amid a more uncertain and volatile macroeconomic environment," Wilding concludes.
(News article translated from Spanish using DeepL)