Economic Growth
Time is running out on the Bank of England’s tightening cycle. UK economic growth is flirting with recession, unemployment is rising, house prices are contracting and inflation is decelerating. Markets are overestimating the eventual bottom in UK inflation, and thus are also underestimating how much the Bank of England will eventually cut rates in the next easing cycle, which could begin as soon as H1/2024. The backdrop is turning increasingly positive for Gilts on a medium-term basis, while the overbought pound is due for a breather.
August offers an opportunity to review our key views. European growth is turning the corner and inflation is improving, but does it guarantee an imminent breakout in European stocks?
China’s extremely high savings rate is the real culprit behind its current economic woes. The authorities have been slow to stimulate the economy, and the risks of “Japanification” have increased. For now, the fact that China is exporting deflation is not such a bad thing. However, if global recession risks were to flare up again, a lethargic Chinese economy would be a cause for concern. Chinese stocks are quite cheap but lack a clear catalyst to move higher. Favor EM markets where earnings and sales estimates have been moving up lately.
