#90 - Crush economic growth or live with inflation? FED ready?

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Economic Growth – In this article let’s see:

How inflation is continuing to be a dominant theme
Why PBOC will continue its accomodative stance to support growth
What could be the trigger to stop the FED, crush economic growth or live with inflation
How many important is for Europe to invest in LNG import capacity over the days

Here you can find other articles of your interest:

Economic Growth – Enjoy the article

2022 midyear outlook

The Great Moderation, a period of steady growth and inflation, is over, in our view. Instead, we are braving a new world of heightened macro volatility – and higher risk premia for both bonds and equities. This regime has echoes of the early 1980s, so we’re calling our Midyear Outlook Back to a volatile future.

We ultimately expect central banks to live with inflation, but only after stalling growth. The result? Persistent inflation amid sharp and short swings in economic activity. We stay pro equities on a strategic horizon but are now underweight in the short run.

Restart of economic activity

We are bracing for volatility in this new regime – our first theme. Central banks are rushing to raise rates to contain inflation that’s rooted in production constraints. They are not acknowledging the stark trade-off: crush economic growth or live with inflation.

The Federal Reserve, for one, is likely to choke off the restart of economic activity – and only change course when the damage emerges. We see this driving high macro and market volatility, with short economic cycles.

Higher risk premia

The Great Moderation fostered a steady macro backdrop that set the stage for decades-long bull runs for both stocks and bonds. Central banks could soften demand shocks and pump up growth with looser policy – facing only a modest trade-off of inflation (the green line in the chart).

The end of the Great Moderation means the trade-offs become much starker, as the orange line in the chart shows. The entire curve has shifted and lengthened, magnifying the impact of policy decisions. At one extreme (bottom right), central banks crush growth to rein in inflation.

This raises recession risk and is particularly damaging for equities. It’s a 2022 story, in our view. At the other extreme, central banks go easy and face the risk of inflation soaring (top left). Bond prices fall as investors demand a higher term premium. We expect this to be the main conundrum for 2023.

Economic Growth – Goldman Sachs Asset Management

Semiannual Insights and Implementation Strategic

Regional divergence driven by varying inﬂation compositions, monetary policy, and growth.
Heightened market volatility creates selective opportunities within and across asset classes.

Central banks and inflation

Central banks and inflation are the two main actors in a play not seen in decades. After many unexpected twists and turns, inflation has continued to be a dominant theme, fueled by tight labor markets, supply chain dynamics, and geopolitical tensions. In the US, the Fed has credibly embarked on policy tightening to rein in price pressures. Elsewhere other major central banks also stand ready to “catch” inflation, though with different policy paths relative to the US.

Economic Growth -Macro Global Growth

We recognize growth risks are skewed to the downside while inflation remains elevated. But we think the deceleration in growth reflects a move into a more sustainable expansion in both developed and emerging markets. A well liquefied banking system, robust private sector balances, strong consumer demand, and relatively limited financial imbalances provide sources of economic stability in the midst of global uncertainty.

Inflation

Inflation across developed economies has become more persistent and broad-based, though the contributors to price pressures vary by region. We expect services to drive US prices as durable goods demand eases. In fact, inflation in supply constrained goods categories may fall to zero on net by year-end. Meanwhile, we believe energy prices will remain the dominant reason for elevated Euro area inflation as supply risks from the Russia Ukraine war persist.

Monetary Policy

Restrictive monetary policy is on the radar for most central banks, though the pace of tightening remains dictated by the regional inflation and growth mix. We believe the Fed will continue to lead the charge in front-loading rate hikes, alongside balance sheet runoff. The ECB may also hike multiple times this year. Meanwhile, we believe the PBoC will continue its accommodative stance to support growth in the face of COVID-19 disruptions, though it is likely past the majority of its rate cuts.

Asset Class Outlook

“We are modestly pro-risk, with a tactical tilt towards real assets, though we acknowledge the risks to our view with humility. Within equities, we think earnings strength in developed markets will support both prices near-term and our conviction of global alpha in the coming years.

Bonds may struggle amid higher inflation, but the search for yield now finds many matches. Lastly, structural imbalances in commodity markets remain unresolved and will likely sustain elevated prices in the near – term. Across markets, we expect volatility to continue until investors find clarity in the macro backdrop.

Economic Growth –Blackrock

Macro and market perspectives

Fossil fuel demand shift

As well as shaping the macro picture, the drive for energy security will clearly reshape energy demand and supply. Europe will have an acute need for more fossil fuels from outside Russia to meet its energy demands and achieve its ambitious plans to reduce its reliance on Russia.

We expect production elsewhere to be ramped up. But global oil, natural gas and coal markets will likely remain tight in our base case scenario – and Europe’s energy cost burden will remain highly elevated.

Imports of LNG

Greater imports of liquefied natural gas (LNG) (such as from Qatar, U.S., Australia and West Africa) will be needed. LNG markets were already tight before the conflict, and Europe will be bidding against others for the available supply – a trigger for the spike in gas prices last year. The ongoing tightness in LNG markets through the year should incentivize producers to expand supply where possible.

Europe will also need to invest in LNG import capacity

The U.S. has committed to increase LNG supplies to Europe by 15 bcm but it will be difficult to do this quickly. Even if supply can be boosted quickly, Europe will also need to invest in LNG import capacity, which had already been running at 95% usage – and that will take time. It is also unclear whether adding further long-lived LNG terminals can be consistent with the EU’s aggressive climate goals unless they can later be retrofitted to accept hydrogen.

Economic Growth – My conclusions and considerations

Well, the situation is not the best in the markets. The volatility is present and uncertainty as always in these periods is present. Research and caution are extremely important in my view.

The markets obviously are suffering, the growth is slowing mainly worldwide, and the inflation is high (even if we have some indicator like PPI that inflation could slow down).

In Europe the situation doesn’t seem to be stabilized and central banks are tightening the economy.

In this article the conclusion that I tried to summarize over 3 recent papers that I read are:

A period of steady growth and inflation is over.
New world of heightened macro volatility – and higher risk premia for both bonds and equities.
Central banks are rushing to raise rates to contain inflation that’s rooted in production constraints. They are not acknowledging the stark trade-off: crush economic growth or live with inflation.
After many unexpected twists and turns, inflation has continued to be a dominant theme, fueled by tight labor markets, supply chain dynamics, and geopolitical tensions.
The deceleration in growth reflects a move into a more sustainable expansion in both developed and emerging markets.
Inflation across developed economies has become more persistent and broad-based, though the contributors to price pressures vary by region.
Energy prices will remain the dominant reason for elevated Euro area inflation as supply risks from the Russia Ukraine war persist.
Restrictive monetary policy is on the radar for most central banks, though the pace of tightening remains dictated by the regional inflation and growth mix
PBoC will continue its accommodative stance to support growth in the face of COVID-19 disruptions, though it is likely past the majority of its rate cuts.
Earnings strength in developed markets will support both prices near-term and our conviction of global alpha in the coming years.
Europe will have an acute need for more fossil fuels from outside Russia to meet its energy demands and achieve its ambitious plans to reduce its reliance on Russia.
Greater imports of liquefied natural gas (LNG) (such as from Qatar, U.S., Australia and West Africa) will be needed.
Europe will also need to invest in LNG import capacity.

Join the conversation with your own take on these topics in the comments below.

About the Author

Alessandro is a Financial Markets enthusiastic and he loves learning from articles/papers on many financial topics and in doing so he shares with you the most interesting charts and comments.

Disclosure

This material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. This material has been prepared for informational purposes only. Any forecasts contained herein are for illustrative purposes only and are not to be relied upon as advice or interpreted as a recommendation.

#90 – Crush economic growth or live with inflation? Is the FED ready?