Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 16/05/23

European growth remains weak by historical standards, amid signs of resilience 
              
Key Takeaways
 
Risk assets have been broadly flat in the past week, as the positive impact of decelerating US inflation was offset by weaker-than-expected activity data in China (investment, production) and the ongoing impasse vis-à-vis the US debt ceiling extension.   

The S&P500 fell by -0.3% in the past week, remaining in a tight range since October 2022 (3900-4100), while euro area equities also declined slightly by -0.3% wow. In Japan, the Nikkei225 climbed to a twenty-month high, due to, inter alia, better-than-expected corporate earnings’ results, as well as the ongoing accommodative monetary policy by the Bank of Japan. Japanese equities have been an underwhelming long-term investment.

Inflation has been on a downward trend, from very high levels, due to sharp monetary policy tightening. US CPI slowed further in April to 4.9% year-over-year from a peak of 9.1% in June 2022 and euro area CPI increased by 7.0% in April year-over-year from a peak of 10.6% in October 2022.

Year-to-date, the MSCI ACWI index has increased by +8% and the Bloomberg Aggregate Bond index has recorded gains of +3%. As a result, the classic 60/40 portfolio has recorded gains of +6%, following losses of -18% in 2022 -- one of the worst drawdowns on record. Asset performance has been resilient as, so far, the global economy has held up well.

Indeed, the European Commission (EC) revised upwards its euro area growth forecasts for 2023 for the second time in a row, as lower-than-expected energy prices have contained the adverse economic consequences of the war in Ukraine. European natural gas prices have fallen sharply, with the “spot” Dutch TTF down by -58% year-to-date (€32/MWh). In a similar vein, Brent oil prices in euro terms have declined by -13% year-to-date (€69/barrel). All told, real GDP growth is expected at +1.1% in 2023 (up by 0.2 pps compared with three months ago), from +3.5% in 2022.

Due to stronger economic activity, euro area CPI inflation is expected to reach 5.8%, on average, in 2023 (from 5.6% expected three months ago), before decelerating to 2.8% (from 2.5% expected three months ago) in 2024.

In a similar vein, Bank of England’s projections for real GDP growth were meaningfully revised up, on the back of: i) less malign assumptions for 2023 global real GDP growth to +2.75% from +2.25%; ii) an alleviation of energy prices, as the direct contribution to Q4.2023 CPI inflation of fuels and lubricants as well as gas and electricity prices, is assumed at -1% from neutral previously; and iii) modest UK fiscal support. 

In all, UK real GDP growth is now foreseen at +0.4% in 2023, +0.7% in 2024 and +0.8% in 2025 (instead of -0.6%, -0.3% & +0.4%, respectively, three months ago). In addition, the Bank of England revised up its CPI estimates across the projection horizon by circa 1 pp (+5.1% yoy in Q4:2023, +2.3% yoy in Q4:2024 and +1.0% yoy in Q4:2025). 

As a result, the Bank of England increased its policy interest rate in the past week by +25 bps to 4.5%, as expected. Market pricing, according to overnight index swaps, points to additional hikes of circa 50 basis points in the next 3 months and to no cuts thereafter, until at least by the end of 2023.    
 
Εβδομαδιαία Επισκόπηση: Διεθνής Οικονομία & Αγορές, 16/05/23
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