Multi-Manager People’s Perspectives

The IMF World Economic Outlook saw a small downgrade to their growth forecast for 2023, with global growth expected at 2.8%, slightly lower than the January forecast of 2.9%. The IMF warned, however, that risks were “heavily skewed to the downside, with the chances of a hard landing having risen sharply”. Chief Economist Pierre Olivier Gourinchas said that “below the surface, turbulence is building, and the situation is quite fragile. Inflation is much stickier than anticipated even a few months ago … more worrisome is the sharp policy tightening of the past 12 months is starting to have serious side effects for the financial sector”.

The IMF noted the turmoil in UK government bonds last autumn and more recently in the banking sector as highlighting “significant vulnerabilities exist among banks and non-bank financial institutions”. The IMF called on central banks to continue working to bring inflation down so long as financial markets remained relatively stable, warning that price pressures could continue to prove more persistent. Gourinchas said that a credit crunch could be a disinflationary force – “as long as it is orderly, some of this lending contraction may actually be beneficial in terms of bringing down inflation and may substitute for further interest rate hikes”.

In terms of the country forecasts, the UK and US saw upgrades, though the IMF still see the UK economy shrinking by 0.3% in 2023. The US is expected to grow by 1.6% and the eurozone by 0.8%. China is expected to grow by 5.2% and India by 5.9%. Of the major advanced and emerging economies, only the UK and Germany are expected to shrink. Even Russia is expected to see growth of 0.7% despite western sanctions. IMF Managing Director Kristalina Georgieva warned that the medium-term outlook was poor, with growth at the weakest pace for over 30 years. The IMF expects growth of 3% over the next 5 years, well below the average of 3.8% seen over the past 20 years. Georgieva said that the key impediments to growth were increasing economic fragmentation and geopolitical tensions; “the path back to robust growth is rough and foggy, and the ropes that hold us together may be weaker than they were just a few years ago”.

The US inflation rate saw a notable deceleration to 5.0% year on year in March, down from 6.0% in February. However, core CPI, which excluded food and energy rose by 5.6%, suggesting price pressures for some goods and services still have some momentum. In China, inflation remains benign. Indeed, the latest data for March showed the pace of inflation slowing further, to 0.7% year on year, an 18-month low. Should they wish to, such low levels of inflation suggest the People’s Bank of China can ease policy though they appear to be in ‘wait and see’ mode to confirm whether the post-Covid reopening drives inflationary pressures higher.

We also saw the latest US employment report, with the Non-Farm Payrolls showing an additional 236,000 jobs in March, broadly in line with expectations. The unemployment rate fell back to 3.5%. The pace of job increases was the lowest since December 2020, while wage growth, at 4.2% year on year, was the slowest since June 2021. Data on temporary hiring, a lead indicator for the broader labour market, showed a 4.1% year on year decline. Such levels are consistent with a recession. The US labour market still appears to be in decent shape but there is a softening taking place as interest rate hikes begin to bite.

While there have been no major central bank meetings, we did see the minutes released from the most recent Federal Reserve meeting, which took place during the fallout from the collapse of Silicon Valley Bank. At the meeting the Fed raised rates by 25 basis points, but the minutes showed lower expectations for further rate hikes with officials noting more cautious and a need to be on alert for a “credit crunch” in upcoming data. Federal Reserve staff forecast a “mild recession starting later this year”. The rates setting committee saw the banking turmoil “contained to a small number of banks with poor risk management practices” with the wider banking system “sound and resilient”.

Meanwhile, we heard from the new Bank of Japan Governor Kazuo Ueda, who made clear he saw so immediate shift from the Yield Curve Control policies of his predecessor Haruhiko Kuroda. The Japanese Yen weakened as Ueda defied expectations of a policy shift soon. In a press conference, Ueda said “given the current economic, price and financial conditions, I think it is appropriate to keep the current Yield Curve Control”. This messaging suggests the Bank of Japan sees no hurry to widen the bands in which the 10-year Japanese Government Bond is allowed to trade, despite having had to spend billions buying bonds to maintain the policy against a backdrop of rising bond yields across developed markets.

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