Global growth has performed better than expected to date, but could developed markets fall into recession? That is one of the questions that many analysts ask themselves when taking positions to obtain future returns. But, beyond that, there are also doubts about the impact on emerging markets. The context is what it is. Developed markets have implemented monetary policies of interest rate increases, the most rapid in history, to combat the highest inflation in the last 30 years.
This has caused seven leading indicators that usually predict economic recession (inversion of the interest rate curve, temporary employment, credit momentum, real estate prices, ‘Leading Indicator’ of the Conference Board, ‘Duncan Leading Indicator’ and aggregate growth in corporate profits) have deteriorated to worrying levels. The recession is not coming. For now.
The unemployment rate in the United States is at 3.8%, which gives the Federal Reserve some room to respond to turbulence, as happened with the Silicon Valley Bank events. However, the deterioration of leading indicators is there, and doubts are how they will affect a cyclical decline in the economy in emerging markets.
According to Gillian Edgeworth, macroeconomic strategist at Wellington Management, the jury is still out, but overall they consider it “more likely that the current sluggish growth in developed markets will continue.” In her view, if they were to fall into a “normal” recession, defined in this context as a quarter-on-quarter contraction of between two and four quarters, “most emerging markets could weather the storm relatively well.” “But in such a scenario, we expect emerging market central banks to accelerate rate cuts and focus less on the stability and strength of their currency,” Edgeworth adds.
The risk of recession
Although the global economy has shown signs of resilience in recent quarters, growth is likely to remain sluggish at best. There has been the largest and fastest cycle of interest rate hikes in decades, along with quantitative tightening, and the financial system’s ability to absorb both simultaneously has not been tested.
Credit growth is slowing in the United States and Europe, while the growing reduction in household savings offers less room to cushion the cycle. Furthermore, any stimulus from China in response to its faltering reopening is unlikely to be the ‘big bang’ it was in the past.
“Although economic models tend to exaggerate the risk of recession – in part because the Strreure Services presented -, History Suggests That Soft Landesays Are Rare (…). Some Indicators Highlight an Increasing Probability of Negative Growth in the Coming quarters: for example, our analysis shows that in previous periods of inversion of the yield curve in the United States, it took an average of three months to mark the peak of activity,” explains the Wellington Management expert.
In the United States, the yield curve has been inverted for once in months. There are very slight signs of labor market weakness. American unemployment has begun to rise. History suggests that when unemployment has been at such low rates, it has risen between one and two percentage points twelve months later.
The impact on emerging economies
Emerging markets have faced harsh adjustments over the past three decades, but since the creation of the asset class, they have had little or no experience of a standard Deutschmark recession. The global financial crisis (GFC) and Covid were much larger disruptions, while in both the 2013 taper tantrum and the 2014-2015 commodity price crash, emerging markets were severely affected due to to its high deficits and its dependence on raw materials.
“If developed countries experience a more normalized recession this time, there will undoubtedly be negative repercussions for emerging markets. But, in our view, they are likely to be more unpleasant than unmanageable for most,” Edgeworth believes.
In the event of a recession in developed markets, the expert predicts that emerging markets will largely reflect the trajectory of the former, with a further weakening of growth and possible contraction, and labor markets that adjust more than they have been. made. done so far. “However, the magnitude of any variation in raw material prices should be monitored, with the main Latin American exporters and South Africa being the most vulnerable,” he concludes.
