4 minGlobal economic growth: what is the outlook?
Guy Wagner While private consumption 'the engine of the US economy' remains buoyant despite the depletion of excess savings, the outlook for growth in Europe does not seem to depend on the ECB's interest rate cuts, says Guy Wagner, Chief Investment Officer of the asset management company BLI, Banque de Luxembourg Investments on July 30th.
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- A resilient US economy, for how long?
- When is the next FED rate cut expected?
- Can the ECB stimulate growth in Europe?
- The craze for technology stocks
- Fiscal sustainability and investors’ response
- Why is the Chinese market still struggling?
- The appeal of the Japanese market
- Limited interest in bonds
- Gold, an asset class that still has good prospects
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Guy Wagner, global economic growth remains relatively stable, but weak. How much longer can a recession be avoided?
The financial markets are mainly interested in the growth of the US economy. The US has managed to avoid recession so far, thanks to its level of public spending and private consumption holding up mainly due to the excess savings accumulated during the Covid pandemic. But the latest figures seem to show that these excess savings have been fully depleted and that the household savings rate remains very low. With private consumption accounting for 70% of the US economy, this could tip the balance in the near future.
The Federal Reserve decided to leave its key interest rates unchanged in the second quarter. Is this good news?
The Fed would still like to cut interest rates, but it would not make sense with inflation still high and the economy staving off recession. It now looks as if they will cut interest rates by September at the latest. We will see if that helps prevent a further deterioration in the labour market.
What is the situation in Europe? What role could the ECB play in stimulating growth?
On the one hand, the manufacturing sector is fairly weak and, on the other, services activities remain dynamic. At the same time, public spending has been less stimulated than in the United States, which explains the weakness of growth in the eurozone. However, we should not overestimate the importance that an ECB cut in interest rates could have in boosting the economy. It is not only about interest rates.
On the financial markets, technology stocks are still dominant. How would you describe the situation?
We are seeing a two-speed market, with a concentration of a few large technology stocks that are driving the market upwards, and alongside them a large number of stocks that have been at their lowest for a year. But as the equity market indices are based on the market capitalisations of these large stocks, from the outside you get the impression that everything is going well.
With political instability in France and the upward revision of the US deficit, the question of fiscal sustainability is more relevant than ever. What impact might this have on investors?
The idea that government bonds issued by the most industrialised countries are risk-free assets is clearly being challenged. The logical consequence is that these investors are demanding much higher risk premiums to continue to hold such bonds, which means higher interest rates. But this does not help governments, which are inevitably seeking to minimise the cost of their very high levels of public debt.
Are other bonds still attractive?
This is an asset class that offers some interest, but not a huge amount. As we have seen, government bonds issued by industrialised countries are struggling, and it is these that influence the pricing of other bonds. Bonds issued by so-called ‘emerging market’ countries have performed much better in recent years, but they are still too risky. As for bonds issued by the private sector, the interest differential is still low.
On the other side of the world, you continue to take a close interest in the Japanese market. Why is that?
It is a market that we like over the medium and long term. Japanese companies are improving their governance, enhancing their profitability and treating shareholders better. They have started to buy back their own shares and increase their dividends. This makes the Japanese market very attractive again, for both domestic and foreign investors.
And then there is gold, which is still doing well...
I think that gold will continue to appeal strongly to investors in the medium and long term. We know that China and its allies are looking to set up an alternative financial system to the one based on the US dollar. Gold plays an important role in this alternative, which explains why Eastern European central banks are buying so much of it. Doubts about the viability of public finances are another factor favouring gold because, unlike silver, its supply cannot be artificially inflated and therefore presents no counterpart risk. Even if a correction cannot be ruled out after 18 months of gains, all these factors are clearly in gold's favour.
