Inflation and interest rates have likely peaked, ushering in a new global economic cycle into 2024, an audience in Guernsey heard from Julius Baer chief economist David Cole.
The effects of high inflation will still be felt next year, but the pressure to keep inflation high is easing and there are signs in many countries that inflation will return to the 2% range that central banks tend to aim for. Consumers have expectations.
Mr. Cole shared the data his team collected to support their findings and advised on economic performance for 2023 as a whole. “Given the tightening of monetary policy, the economy has performed very well this year,” he said.
“The full impact of tight monetary policy on the economy and inflation statistics tends to be delayed by about 12 months, so it is only now that we can say with any degree of confidence that it will be June 2022. appears to have been the peak of inflation in many economies. ”
The latest data released by Julius Baer shows that underlying inflation in the United States and the euro area was just above 2%. All factors driving inflation, including lower producer and import prices in the euro area and corporate price increases in the United States, have fallen significantly from their peaks in mid-2022.
Cole said the recession that many economists feared earlier this year appears to have been averted. “The private sector is extremely healthy.'' Balance sheet. Of course, some industries, especially those that are sensitive to interest rates such as construction and real estate, are still struggling a bit, but they have not collapsed. ”
Investment has remained high throughout business cycles, and “the biggest surprise in this cycle is that you would normally expect investment to fall when you see monetary policy tightening,” Cole said. Ta. “But that didn't happen this time. In fact, the opposite happened and investments increased significantly, as opposed to after 2008 when interest rates were much more favorable for investments.”
US and China risks
Cole touched on the influential economies of the United States and China, with the former showing strong indicators of growth driven by consumer spending.
“We're seeing U.S. household incomes rise at the same time as inflation falls, and that's the secret to increasing purchasing power,” he said. “This is a good sign and consumers are certainly relieved. Whether that will be enough to trigger a boom in consumer spending remains to be seen, but we are hopeful.”
But the ever-widening ideological polarization between Democrats and Republicans poses risks. Differences of opinion make it difficult to have a unified stance on the economy, making a consistent and proactive approach less likely.
Another threat to the global economy comes from the collapse of China's real estate market, and much will depend on how the Chinese government responds.
Private household debt in China is higher than in the United States, Germany or France, and the private debt service ratio has been steadily rising, now exceeding 20%. This is the ratio of private sector debt service (payments plus interest) to income.
This situation is further exacerbated by falling house prices, which have been falling for 26 months.
“This doesn't come out of the blue,” Cole said. “The long-term real estate deflation has made lenders extremely nervous, resulting in homeowners spending less and saving more. So far, the government has not intervened, and economic growth is expected to help households get out of debt. We're watching what happens here because it could have an impact on the overall performance of China's economy, which has implications on the world stage.”
Cash is attractive, but it doesn't win in the long run.
Craig Allen, Head of Investment Management at Julius Baer Guernsey, also spoke to the audience and reported on the performance of his investment portfolio.
Allen said the main question from Julius Baer's customers is: “Why invest when you can earn more than 5% on bank deposits alone?”
Bank cash has performed well over the past two years as bonds, previously a reliable source of yield for most portfolios, have underperformed. However, when plotted over the past year, cash does not outperform a balanced portfolio.
“It's true that bond performance is hitting investors hard,” Allen said. “I understand why cash is attractive, but our data shows that even in periods of strong cash performance, it takes him, on average, two years for his portfolio to catch up. A diversified portfolio is much better off in the long run.
“The poor performance of bonds means we are looking at probably two-and-a-half years before portfolio returns outperform cash again, so if you are making a big purchase in the next six months, It may be better to keep the resources you need in cash rather than invest.
“However, historical performance data shows that cash does not work in the long term.”
Mr Cole and Mr Allen were speaking to an invited audience at the Julius Baer Guernsey Market Outlook event held at the OGH Hotel on Wednesday 22 November 2023.
Photo: Craig Allen, David Cole, Jean-Luc Le Toc
