The Global Economy Under Macroscope: January
To check on my predictions for this year https://canarywharfian.co.uk/threads/my-economic-predictions-for-2023.705, I will try to review the past month from an economic point of view, hopefully every month from now on. While January is usually a somewhat slow month because of the Christmas holidays in most of the world, there are signs of hope for a quicker than expected recovery and that things in 2023 might not turn out as bad as feared. While rates of inflation remain high at levels not seen for years or even decades, forecast and market expectations are that inflation will be stable in 2023 in most large economies https://www.ft.com/content/088d3368-bb8b-4ff3-9df7-a7680d4d81b2 (note that a stable or even falling rate of inflation still means that things are getting more expensive, you would need deflation for prices to drop). While companies are posting record revenue, some of that can be explained with higher inflation, so you would need to look at profits or earnings as costs have also increased and some companies do not fare as well https://www.economist.com/business/2023/01/22/big-business-is-in-for-a-rough-earnings-season Inflation is usually calculated based on a basket of goods and services that an average consumer purchases. Should you not be an average consumer, you might be affected more (or less) by inflation than the official rate implies. It is also not uncommon for inflation estimates to be corrected after a year or so, so I would always look for trends rather than absolute figures when making decisions. That being said, the current levels of inflation are so high that even a correction of a percentage point will not change the story. Interest rates stay at high levels compared to the last couple of years and will probably remain at these levels as long as inflation stays higher than their mandates prescribe. Strictly speaking, it is February now, but you will have seen the news of a rate increase by both the Fed and the Bank of England and there is the expectation of at least one more increase, but also that rates will plateau this year https://www.bbc.co.uk/news/business-57764601. Why does this matter? It increases the cost of capital, so might dampen investment and eventually growth which will hurt the UK especially hard as there has been a lack of investment and low productivity (see below). It will also keep share prices low (if your savings account pays interest, you might not want to buy shares). This a global phenomenon - even the Bank of Japan is going to tighten its monetary policy https://www.bloomberg.com/news/articles/2022-12-20/yen-jumps-dollar-sinks-after-boj-surprises-with-policy-tweak, so let’s see next month how this has developed, both on a global and a national level. While retail energy prices might not have fallen yet (partly because they did not go up as much as prices on world markets and utilities usually hedge against price increases), we have seen natural gas prices fall by 44%. Spot and forward prices might develop differently, but one of the main drivers of inflation in recent time has fallen significantly, almost to levels before Russia started the war in Ukraine. Oil prices (Brent) have fallen slightly by 0.7% as well. This brings some welcome respite to inflationary pressures. Share prices have seen decent growth in January (Dow Jones + 3.2%, NASDAQ +11,9% (it tends to be more volatile than non-tech indices), FTSE 100 + 3.4%, German DAX 40 even +10.2%), but it remains to be seen if this is part of a longer rally https://www.economist.com/finance-and-economics/2023/02/01/rallying-markets-suffer-from-a-doveish-illusion - compared to the 2022 performance of falls by as much as 20 or 30%, this is some welcome respite. Should this trend continue, and you have a regular investment plan https://canarywharfian.co.uk/threads/personal-finance-budgeting-and-saving-for-retirement.708/, you might see a decent performance of your portfolio again soon as you kept on buying through a period of low prices (back to a performance trajectory as before). If you are into more adventurous investments, Bitcoin (and also other cryptocurrencies) has gained almost 40% in January and it seems that its price is somewhat correlated with NASDAQ, so it might not be an investment decoupled from other asset classes after all https://coinmarketcap.com/alexandria/article/Bitcoin-Touches-dollar24000-as-Federal-Reserve-Enforces-Smaller-Interest-Rate-Hike It remains to be seen what China’s reopening after years of strict Covid lockdown brings https://www.reuters.com/breakingviews/chinas-reopening-generates-mirage-normality-2023-01-27/ - in the medium term, commodity prices should rise, and it will go back to its usual growth trajectory, but you could make the argument that the current wave of Covid cases puts a dampener to growth in the first quarter. This could also give a boost to companies exporting a lot to China, especially in continental Europe and lift the eurozone out of a potential recession. Worst case scenario would be the emergence of a new variant amongst the hundreds of millions of cases currently being reported. As for the UK, things are not looking good – the IMF forecasts the slowest growth (read: contraction) of any large economy, even slower than Russia. https://news.sky.com/story/uk-economy-to-fare-worse-than-any-other-country-in-developed-world-this-year-imf-forecasts-12799201 - it seems that Brexit is finally biting, but Britian is also more dependent on gas than other countries and there is very little public investment https://news.sky.com/story/why-does-the-uk-fare-so-poorly-in-the-latest-imf-forecast-12799691 Bear in mind that the UK also has seen a lost decade without any productivity growth https://www.cambridge.org/core/journals/national-institute-economic-review/article/abs/is-the-uk-productivity-slowdown-unprecedented/287949348D9BBA0223B3EA7E532C4B22 On the positive side, inflation has dropped a bit, but is still in the double-digit figures https://www.theguardian.com/business/2023/jan/18/uk-inflation-dips-people-continue-to-feel-pinch so you can understand the reasoning behind the strikes in the public sector. It means that there has been an income cut in real terms (i.e. after inflation), so to catch up with inflation big increases in pay are needed.
The Global Economy Under Macroscope: January
GENERAL
by LondonFinance on February 2nd 2023
To check on my predictions for this year https://canarywharfian.co.uk/threads/my-economic-predictions-for-2023.705, I will try to review the past month from an economic point of view, hopefully every month from now on. While January is usually a somewhat slow month because of the Christmas holidays in most of the world, there are signs of hope for a quicker than expected recovery and that things in 2023 might not turn out as bad as feared. While rates of inflation remain high at levels not seen for years or even decades, forecast and market expectations are that inflation will be stable in 2023 in most large economies https://www.ft.com/content/088d3368-bb8b-4ff3-9df7-a7680d4d81b2 (note that a stable or even falling rate of inflation still means that things are getting more expensive, you would need deflation for prices to drop). While companies are posting record revenue, some of that can be explained with higher inflation, so you would need to look at profits or earnings as costs have also increased and some companies do not fare as well https://www.economist.com/business/2023/01/22/big-business-is-in-for-a-rough-earnings-season Inflation is usually calculated based on a basket of goods and services that an average consumer purchases. Should you not be an average consumer, you might be affected more (or less) by inflation than the official rate implies. It is also not uncommon for inflation estimates to be corrected after a year or so, so I would always look for trends rather than absolute figures when making decisions. That being said, the current levels of inflation are so high that even a correction of a percentage point will not change the story. Interest rates stay at high levels compared to the last couple of years and will probably remain at these levels as long as inflation stays higher than their mandates prescribe. Strictly speaking, it is February now, but you will have seen the news of a rate increase by both the Fed and the Bank of England and there is the expectation of at least one more increase, but also that rates will plateau this year https://www.bbc.co.uk/news/business-57764601. Why does this matter? It increases the cost of capital, so might dampen investment and eventually growth which will hurt the UK especially hard as there has been a lack of investment and low productivity (see below). It will also keep share prices low (if your savings account pays interest, you might not want to buy shares). This a global phenomenon - even the Bank of Japan is going to tighten its monetary policy https://www.bloomberg.com/news/articles/2022-12-20/yen-jumps-dollar-sinks-after-boj-surprises-with-policy-tweak, so let’s see next month how this has developed, both on a global and a national level. While retail energy prices might not have fallen yet (partly because they did not go up as much as prices on world markets and utilities usually hedge against price increases), we have seen natural gas prices fall by 44%. Spot and forward prices might develop differently, but one of the main drivers of inflation in recent time has fallen significantly, almost to levels before Russia started the war in Ukraine. Oil prices (Brent) have fallen slightly by 0.7% as well. This brings some welcome respite to inflationary pressures. Share prices have seen decent growth in January (Dow Jones + 3.2%, NASDAQ +11,9% (it tends to be more volatile than non-tech indices), FTSE 100 + 3.4%, German DAX 40 even +10.2%), but it remains to be seen if this is part of a longer rally https://www.economist.com/finance-and-economics/2023/02/01/rallying-markets-suffer-from-a-doveish-illusion - compared to the 2022 performance of falls by as much as 20 or 30%, this is some welcome respite. Should this trend continue, and you have a regular investment plan https://canarywharfian.co.uk/threads/personal-finance-budgeting-and-saving-for-retirement.708/, you might see a decent performance of your portfolio again soon as you kept on buying through a period of low prices (back to a performance trajectory as before). If you are into more adventurous investments, Bitcoin (and also other cryptocurrencies) has gained almost 40% in January and it seems that its price is somewhat correlated with NASDAQ, so it might not be an investment decoupled from other asset classes after all https://coinmarketcap.com/alexandria/article/Bitcoin-Touches-dollar24000-as-Federal-Reserve-Enforces-Smaller-Interest-Rate-Hike It remains to be seen what China’s reopening after years of strict Covid lockdown brings https://www.reuters.com/breakingviews/chinas-reopening-generates-mirage-normality-2023-01-27/ - in the medium term, commodity prices should rise, and it will go back to its usual growth trajectory, but you could make the argument that the current wave of Covid cases puts a dampener to growth in the first quarter. This could also give a boost to companies exporting a lot to China, especially in continental Europe and lift the eurozone out of a potential recession. Worst case scenario would be the emergence of a new variant amongst the hundreds of millions of cases currently being reported. As for the UK, things are not looking good – the IMF forecasts the slowest growth (read: contraction) of any large economy, even slower than Russia. https://news.sky.com/story/uk-economy-to-fare-worse-than-any-other-country-in-developed-world-this-year-imf-forecasts-12799201 - it seems that Brexit is finally biting, but Britian is also more dependent on gas than other countries and there is very little public investment https://news.sky.com/story/why-does-the-uk-fare-so-poorly-in-the-latest-imf-forecast-12799691 Bear in mind that the UK also has seen a lost decade without any productivity growth https://www.cambridge.org/core/journals/national-institute-economic-review/article/abs/is-the-uk-productivity-slowdown-unprecedented/287949348D9BBA0223B3EA7E532C4B22 On the positive side, inflation has dropped a bit, but is still in the double-digit figures https://www.theguardian.com/business/2023/jan/18/uk-inflation-dips-people-continue-to-feel-pinch so you can understand the reasoning behind the strikes in the public sector. It means that there has been an income cut in real terms (i.e. after inflation), so to catch up with inflation big increases in pay are needed.
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