General Economic Overview – Quarter 3 2023

Sentiment has become more negative this quarter, and this is reflected in markets, notably in August and September. The wider global economic picture is resilient with central banks still fighting inflation and, in some cases, continuing to raise rates to levels last seen at the beginning of the century. This does not mean that the threat of inflation has increased just that policymakers are cautious as to the effects that higher rates are having. In the US for example, rates are over 5% yet the economy remains relatively robust with low levels of unemployment and strong consumer spending.

Inflation remains the most important metric for all economic and market observers as it is dictating central bank policy. Last quarter we noted that data indicated that inflation had peaked in several western economies and whilst this continues to be true, the level of inflation is much higher than central banks’ longer term targets. A recent survey by the IMF studied over 100 inflation shocks in 56 countries since the 1970s and highlighted that most inflation fights took at least three years to resolve and that the successful ones came when central banks raised rates higher and kept them there for longer. Another observation was that aggressive monetary and fiscal policy did not result in a heavy economic toll over the longer term (five year data). Although not widely commented on in the press, this kind of survey will no doubt influence policymakers’ actions in the coming months, suggesting interest rates will be held higher for longer. Unlike the ECB, the Bank of England and the Federal Reserve all held rates in September as both felt a pause was appropriate after falling inflation rates, although the Bank of England’s (BoE) decision was split suggesting the decision was close.

We noted last quarter that the threat of recession had lessened compared to earlier in the year, as stronger economic data continued to defy previous expectations. Low unemployment rates and relatively robust consumer spending across developed nations seemed to be holding off any recession for the time being. This view has not altered with the potential for a soft landing increasing as consumer data continues to show a robust response to tightening. It is still the view of the Fed that the battle with inflation is not over, and that a ‘higher for longer’ environment is now anticipated with the potential for one further interest rate rise this year. Every message on interest rate movements from central banks is quoted as being ‘data dependent’ and the recent pause in rate increases by the BoE is an example of this, it was not anticipated by markets but better than expected inflation data in September swayed the vote.  Recent OECD data forecasts show a slowing global economy and central banks in emerging economies have also begun cutting rates, indicating the direction of policy in the coming quarters. Cutting rates in the West seems unlikely in the short term as yields continue to fluctuate.

How stock markets progress over the next 12 months will depend on how markets perceive firstly the possibilities and then the eventual economic outcome delivered.  In the early part of the rate tightening cycle, markets were focused and split between the possibilities of a soft or hard landing, but now a third scenario has evolved which can be described as no landing or ‘growthflation’ which is particularly applicable to the US.  Over the last quarter it has become apparent that different regions of the world may well behave in very different ways, with growth in the US proving far more resilient than is the case in Europe or the UK, whilst the Chinese economy has delivered a tepid post-Covid recovery due to weakness in the property market.

Please be aware that this material is for information purposes only and is supplied by Rayner Spencer Mills Research, an independent research consultancy. Any forecasts, figures, opinions, statements of financial market trends or investment techniques and strategies expressed are, unless otherwise stated, Rayner Spencer Mills Research own at the date of this document. They are considered to be reliable at the time of writing, may not necessarily be all-inclusive and are not guaranteed as to accuracy. They may be subject to change without reference or notification to you. Neither Equium Wealth Management Limited or Rayner Spencer Mills Research accepts any legal responsibility or liability for any matter or opinion expressed in this material.