Investors are becoming overly optimistic about the global economy | Bot To News

A RARELY wave optimism flows through the financial markets. For most of the year, US high inflation has proved alarmingly persistent, Europe’s energy crisis has threatened a deep recession, and China’s economy has been plagued by covid-19 shutdowns and a real estate collapse. Investors are now cheering for developments on all three fronts. US annual inflation fell from 8.2% to 7.7% in October. Natural gas prices in Europe have fallen by two-thirds from their peak in August. China eased some restrictions linked to its “zero covid infection” policy and on November 11 unveiled measures to reduce financial pressure on struggling property developers. The flurry of news sent global stocks up 13% since mid-October as traders priced in fewer rate hikes by central banks and sent the dollar lower.

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Alas, investors are getting ahead of themselves. US inflation is easing as pandemic-related supply chain disruptions fade. A year ago, dozens of ships were docked off Los Angeles waiting to be unloaded, and semiconductors and used cars were in short supply. Today, the dock is empty, tokens are glutted, and car prices are falling. These improvements are likely to continue. And from March 2023, year-over-year price comparisons will also no longer look back to the time before the Russian invasion of Ukraine, when oil was cheaper. This will lead to a further reduction in headline inflation.

But when inflation moderates, it will be harder to fight it. American wages are growing at an annual rate of over 5% because the labor market is still extremely tight; there are almost two vacancies for every unemployed worker. The Federal Reserve’s 2% inflation target is compatible with wage growth of only about 3-4% (reflecting inflation, productivity growth, and possibly a rebound in workers’ share of economic output). Although job growth has slowed, the Fed is likely to continue raising interest rates until the labor market cools. Some disinflation could come easily today, but a return to 2% will almost certainly require a recession.

Europe’s energy crisis is experiencing a similar apparent reprieve. Natural gas prices fell because storage levels are high and the weather has been mild. However, the European economy is likely to be shrinking nonetheless – and this is only the beginning of an energy crunch that will last at least two winters. Next year, Europe may have to refill its storage without Russian piped gas. The weather could be colder and global LNG prices could be higher. Worse, the inflation that has so far been fueled by energy prices appears to be consolidating. British annual inflation reached 11.1% in October; excluding food and energy products, it was 6.5 percent. Across Europe, wage growth is rising and inflation expectations are rising, making it harder to balance the fight against inflation with supporting the economy.

China’s economy has the greatest potential to pleasantly surprise in 2023, having been hit hard by the zero-covid policy and the real estate crash. The authorities have revealed 20 fixes to their Covid rules and 16 measures to help property businesses. However, the road will be long and difficult on both fronts. Rising infections mean further closures may be imminent. A successful covid-free end would boost growth, but a chaotic “exit wave” of infections in a population barely exposed to the virus could cause panic and further damage the economy. Real estate measures have helped builders and reduced the possibility of a financial meltdown, but housing demand, and thus real estate’s contribution to growth, is likely to remain subdued. The problems of the global economy are still severe. He won’t just shrug them off.

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