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Friday 06 January 2023
January 2023 | In Europe, due to high inflation and a fall in household and business confidence, the outlook remains uncertain, with a risk of gas rationing during the winter, which would cause industrial production to fall further. In the short term, the drivers of domestic demand (consumption and investment) have been weakened. High energy prices are weighing on industry, construction, and investment. Meanwhile, inflation is reducing real incomes and real wages are falling despite increases in negotiated wages and a strong labor market.
01 | This Month’s Topic: In one month, China dropped most of its Covid-related restrictions, vowed to support the housing market more, and set pro-growth policies. We expect the Chinese economy to be separated from the global slowdown in 2023.
02 | Thematic: The energy crisis resulting from the war in Ukraine has profoundly altered Europe’s economic performance and prospects. Countries have been affected unevenly, based on how dependent they are on Russian gas and oil.
03 | Global Research: Recession risks remain prominent for mid-2023 in the United States, while for Europe we confirm our expectations of a cost-of-living- and inflation-driven recession during the upcoming winter season.
Unless otherwise stated, all information contained in this document is from Amundi Asset Management US (Amundi US) and is as of January 06, 2023. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi US and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results. Amundi Asset Management US is the US business of the Amundi Asset Management group of companies.
Three key arguments support the Japanese market: (1) A recovery in profits (2) A strong incentive from the Tokyo Stock Exchange for companies to improve their capital efficiency and (3) The shift out of deflation is boosting a market rerating. The risks to these positive arguments are mostly linked to the yen. A strong comeback by the yen, should global equity volatility increase sufficiently in 2024 to encourage the unwinding of carry trades, would weigh on the performance of Japan's equities in local currency It would penalize profits and, everything else being equal, slow the process of increasing inflation, weighing on valuations at the same time.
The US Federal Reserve has indicated that its "Higher for longer" narrative is over. The Fed does not want to restrict the economy longer than necessary, and is attentive to the impact of higher rates on growth. It is now back to the point where both mandates (price stability and maximum sustainable employment) are important. Despite recent positive developments, Christine Lagarde said the European Central Bank (ECB) shouldn't lower its guard as inflation tumbles, admitting that "we did not discuss a rate cut at all." The divergence between the Fed and the ECB is particularly notable given the eurozone's recent weaker economic performance and more rapid disinflation compared to the US.
We believe 2024 will see the tide turn for the economic and monetary policy outlooks, while fiscal policy may experience constrained consolidation with the focus remaining on the energy transition. We expect the United States to face a recession in H1 as stringent financial conditions begin to impact consumers and businesses. In H2, we expect growth to stabilize below its potential and inflation to move closer to its target. We expect a gradual weakening of global growth, while inflation is expected to temper but stay above central bank targets. We call this a fragmented outlook, marked by divergent economic trajectories.
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