Investment Institute
Viewpoint Chief Economist

Growing, (too) Fast and (too) Slow

  • 28 August 2023 (10 min read)

Key points:

  • Markets had a “grumpy August”. Bond yields rose in response to the US still growing too fast, while the confirmation of deflationary risks in China – and the lack of policy response - dampen investors’ animal spirits.
  • Euro area softness extends beyond Germany

In our latest Macrocast on 31 July we had left our readers with a – probably typically – pessimistic note, describing the short-term outlook for the Euro area as a “hardish landing” and expressing doubts on a soft landing being all what it is going to take to tame inflation in the US. We don’t feel chirpier after a few weeks’ rest and unfortunately it now seems the markets are also looking somewhat downbeat. As of Friday 26 August, the S&P500 was down nearly 4% on the month while the Dax lost a bit more than 5%. Summer markets can be fickle, and there has already been some rebound from the lows hit around 20 August, but investors’ caution could be justified as the world economy is having to deal with two unrelated headwinds. The confirmation of the resilience of the US economy is putting to rest the market’s hopes of a swift reversal of the Fed’s policy stance, which has pushed long-term yields further up, while the scenario of a “deflation trap” in China is getting more substantiated by the recent dataflow, with only timid policy response from Beijing so far. In a nutshell, economies are growing either “too fast” or “too slow”.

There is not one single “paradigm” explaining cyclical conditions across the main economic regions now. For China, Rogoff’s “debt supercycle” model is persuasive – but then the PBOC should react by engaging in more decisive rate cuts, to ease the pain of the balance sheet adjustment while structural reforms deal with the persistent imbalances in Real Estate. For the US, Charles Goodhart’s focus on a reversal of the balance of power on the labour market provides an interesting model.  

Europe finds itself faced with the double whammy of slower Chinese demand and some contagion from higher interest rates from the US which compound the ECB’s tightening. A new concerning development is that business confidence is deteriorating markedly outside Germany, affecting countries which so far had been performing rather well, such as France.

Growing, (too) Fast and (too) Slow
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