The Global Economy under Review: January


Management Consulting
Dec 21, 2022
To check on my predictions for this year, 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 (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 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 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, 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 - 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, 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

It remains to be seen what China’s reopening after years of strict Covid lockdown brings - 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. - 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 Bear in mind that the UK also has seen a lost decade without any productivity growth On the positive side, inflation has dropped a bit, but is still in the double-digit figures 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.


Global Markets
Dec 24, 2022
I would add a few important developments from January.
1) Equities had the second-best monthly performance in the last 20 years.
2) The European economy performed better than expected in the last quarter while the US economy performed worse than forecasted
3) There are around 2 open jobs for each vailable worker in the USA
4) Stocks and other risky assets rallied sharply while investors have been cautious and underweight risky assets
5) The market is pricing fewer hikes and sooner reversal of FED monetary policy vs the forecast of the FED
6) The dollar remained strong vs G7 currencies but it is weak vs commodities
7) The US hit its debt ceiling and the government expenditure on its debt has skyrocketed (exceeding the defense budget).
8) Cash levels hit all-time highs (US money market funds)
9) IMF raised its forecast for global economic growth
10) Investments in crypto startups plunged 91%
Jan 30, 2023
Do you believe that, with lower energy prices, we will see inflation going down as well, leading to the plateau in interest rates happening mid year, which will then - hopefully - go down?


Management Consulting
Dec 21, 2022
Do you believe that, with lower energy prices, we will see inflation going down as well, leading to the plateau in interest rates happening mid year, which will then - hopefully - go down?
Hopefully yes - energy prices are a major driver of inflation at the moment (but not the only one), so inflation rates should go down in the next couple of months. If that is enough for interest rates to go down remains to be seen, but they won't go up