The Global Slow Down Has Begun to Show its First Signs
- Publication Date: 02/16/2024
Executive Summary
In this concise research note, we turn our attention to the latest economic developments from the UK, Japan, the EU, and China. The information emerging from these crucial global regions clearly signals an ongoing slowdown in the global economy. Furthermore, despite the stock market's rally, driven by anticipations of rate cuts, the U.S. faces soaring recession probabilities, now at record levels. The current U.S. Recession Probability Rate, standing at 61%, provides strong evidence of a tangible recession unfolding on a global scale
The UK's Economic Forecast
The UK's economic outlook reflects a precarious balance between mild growth and the risk of recession. Recent data suggests a potential mild recession, with GDP showing modest growth in November but a contraction over the previous three months. This situation places the UK economy on the brink of a technical recession. However, forecasts for 2024 are slightly more optimistic, expecting a recovery as inflation eases and household incomes see a real increase.
The British Chambers of Commerce (BCC) anticipates the UK economy will remain in recession for five quarters before a weak recovery in 2024, with a significant downturn in household spending and business investment. Despite a projected growth, the recovery is expected to be anemic, with lingering challenges in business confidence and investment.
The UK's Bond Market and Outlook
The UK's bond market dynamics indicate a resilience in corporate issuance despite economic headwinds. High Yield (HY) issuances, representing a smaller fraction of the market, suggest limited direct impact on overall employment from potential bankruptcies. However, the broader economic outlook remains cautious, with the Bank of England's policy adjustments poised to influence the market significantly. The potential for economic stress in the coming years, particularly with bond rollovers, underscores the fragile nature of the recovery path.
Japan's Economic Contraction
Japan, once the world's third-largest economy, has slipped into recession, falling behind Germany. This downturn is marked by decreased consumption and exports, complicating the Bank of Japan's stimulus withdrawal efforts amid rising inflation. The government's response, a substantial fiscal package, aims to mitigate the inflationary impact, but GDP's significant third-quarter contraction raises concerns about a sustained recovery.
The Inflation Challenge and Wage Growth in Japan
Deloitte Insights highlights the struggle of Japan's economy to gain momentum against the backdrop of inflation eroding purchasing power. Despite an accommodative monetary policy, real spending falls as inflation outstrips wage growth. The expectation of wage increases in the second quarter of 2024, in conjunction with government relief measures, is anticipated to foster recovery. However, export growth is expected to slow, with a brief surge in motor vehicle exports unlikely to sustain the economy's broader needs.
The EU's Economic Forecast
The European Union's downward revision of its 2024 GDP growth forecast from 1.2% to 0.9% signals a cautious stance toward the bloc's economic recovery. This adjustment reflects the ongoing struggle to balance inflationary pressures with growth initiatives, highlighting the broader economic challenges faced by major global economies in the current climate.
China's Weak Consumer Confidence
The World Bank's report highlights that China's economic activity has shown signs of recovery in 2023, driven by an increase in service demand, resilient manufacturing investment, and public infrastructure stimulus. Despite these positive signs, the recovery is marked by volatility, ongoing deflationary pressures, and still weak consumer confidence. The report suggests that the path forward for China's post-pandemic growth will require sustained policy support and deeper structural reforms.
Overall, while there are positive signs of recovery, such as the increase in exports, China's economy still faces significant challenges that could affect its growth momentum. The government's response and policy measures in the coming months will be crucial in steering the economy toward a more stable and sustained recovery path.
Central Banks' Delicate Balancing Act
Major economies are grappling with the dual challenges of managing inflation and sustaining growth. The adjustments by central banks, including the Bank of Japan and the European Central Bank, underscore the complex interplay of monetary policy and economic recovery efforts. As global economies navigate these turbulent waters, the evolving economic indicators will critically inform policymakers' strategies in the coming months.
Conclusion
The economic slowdowns in the UK and Japan, along with China's weakness and the EU's downward revisions of growth forecasts, signal a broadening global economic downturn. Adding to the concern is the January 2024 recession probability standing at 61%, significantly higher than during the major downturns of 2001 and 2008. This stark statistic underscores the gravity of the current financial landscape, challenging the previously optimistic market growth expectations for 2024 and highlighting the need for a recalibrated, more conservative outlook on global economic prospects.
Warm Regards
The Scholarch Research Team
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