Bell’s view is that “different parts of the US economy are performing very differently to each other, with the services sector in very strong shape, while construction is in trouble.
"I think the reality is that the US economy is neither booming nor on the edge of recession. And I think the Federal Reserve is going to keep raising rates until they see that wage growth end.”
Chinese expansion and reopening
Dario Perkins, managing director for global Macro at TS Lombard says that part of the reason optimism has started to seep into market and economic forecasts is in expectation of the performance of the global economy “decoupling” from that of the US, with the latter economy weakening this year, but China’s expansion enabling emerging markets and European economies to avoid recession.
The most recent economic data to emerge from China, released on January 17, showed the economy grew by just 3 per cent in 2022(which is both the lowest level in China for many years and lower than the UK achieved), but that growth rate occurred during a period of covid restrictions.
Perkins says: “Taken together, China’s reopening and lower European energy prices could lend important support to the global economy this year, providing a degree of resilience even if US economic activity continues to deteriorate.
"Indeed, with the US dollar already down significantly and non-US equities outperforming, there is even talk of a ‘decoupling’ in global markets. The decoupling theme is often a dangerous one.
"Since European GDP and inflation tend to lag the US, episodes of decoupling tend to be short-lived, with the rest of the world eventually succumbing to US-led downturns.”
Perkins agrees that European economies will be the biggest beneficiaries” of China’s re-opening, principally as a result of increased demand for consumer goods, but he questions whether the “magnitude” of the impact will be sufficient for Europe to overcome the impact of the decline of US economic performance.
He feels that when populations exit lockdowns, they tend to consume services and goods which are available closer to home, rather than exports, and this reduces the “spillover” impact into the wider global economy.
European strength
But European data has been interesting, with German GDP declining by 0.2 per cent in the final quarter of 2022 (in the same period UK GDP was flat), and for the wider Eurozone, growth was 0.1 per cent.
What does this mean for investors?
In terms of what this means for investors, Bell says it is unlikely that inflation can fall in the US unless corporate profit margins fall, something which would be expected to be negative for equities, then inflation in the US cannot fall.
