Our key thesis remains that major developed markets economies are going to see a material slowdown and most likely a recession. Some emerging markets economies (especially China) look fragile as well.

Various reasons might have supported the global economy in 2023, helping GDP to beat expectations:
  • Strength in consumer spending patterns. COVID distortions and previously accumulated excess savings supported abnormal spending. Increase in consumer credit (e.g., credit card debt) might be another factor.
  • For years corporates and household had the opportunity to lock in fairly low rates. This might perhaps make the “long and variable lags” of monetary policy even longer in this cycle.
  • Governments continued to spend in 2023 with still fairly elevated deficit levels.

Three factors affecting economic growth

When we look at the current state of global economies, we think a slowdown at this stage might be even more likely. There at least three key factors to support such thesis, especially in the US:
  1. The aforementioned long and variable lags in monetary policy
  2. The contraction in lending activity and the tightening in lending standards
  3. Less support for consumption.

With regard to long and variable lags, history has always shown that monetary policy takes time to affect economies. We do not see any structural change that should make things different this time.

Long and variable lags

Increases in unemployment rate tend to arrive well after the last rate hike

Source: Bloomberg. As of 31.10.23

In the lending space we have been noticing worrying trends in recent quarters. In the US as well as in the Eurozone, not only have banks been tightening lending standards, but have also started to reduce lending activity. Contractions in variables such as commercial & industrial loans are not that common in history. Similar patterns characterized the GFC period for example. Tighter or more expensive lending historically has always had some kind of consequence in the long run on the job market.

Bank assets have now started shrinking

Growth chart
Source: Bloomberg. As of 31.10.23

As mentioned, consumption has been a key driver for recent strength in the US economy. The extraordinary accumulation of excess savings in the COVID period helped. In the last 12 months households have been able to artificially inflate their spending patterns by reducing these savings and using more consumer debt. Various estimates see a strong drop in excess savings in the US, especially in the lower percentiles of the income distribution. At the same time the cost of consumer debt has reached a worrying level.

We continue to expect further disinflation when looking at YoY numbers for headline and especially core inflation. The gradual catch-up of shelter inflation with trends seen in the past quarters in the new rental market will clearly be supportive in this sense.

Excess savings in the US are almost depleted

Excess savings have fallen for 23 months in a row.
US excess savings depleted for bottom 80% of households
Growth chart 2
Source: Federal Reserves, Bloomberg calculations, as at September 2023.
Note: March 2020 = 100

Outside the US

Outside the US, the environment looks even more fragile. Higher reliance on manufacturing has already brought the Eurozone in what de facto is a mild recession. Similar trends are also appearing in the UK, where mortgage repricing remains a key risk. Finally, we continue to believe that China will continue to disappoint as it wrestles with many structural issues for years to come. These developments will provide central banks across the globe with reasons (or perhaps the need) to be less hawkish.

We see material value in government bonds in developed markets (US and Australia in particular) and in some emerging markets (S. Korea, Brazil) and appreciate the advantage of a high duration stance in the current conditions. We see meaningful value along the curve and advocate a fairly diversified stance in terms of maturities. Corporate credit markets look complacent with mounting recessionary risks, with global high yield spreads around long-term averages and well below recessionary averages. We continue to see value however in more defensive sectors such as telecommunications, healthcare, consumer staples and selectively across financials. We see weakness ahead in more cyclical sectors (e.g. chemicals) or in areas more exposed to consumer behaviour (e.g. automotive, retail).

The value of active minds: independent thinking

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