Is a recession really inevitable this year? In 2022 there were particularly gloomy scenarios on the economic prospects for 2023, in a context of marked tensions on energy (which weighed on European growth and strangled the purchasing power of households with an increase in inflation), but in the meantime the growth concerns eased somewhat (although they did not disappear) following the sharp drop in gas prices and the release of better-than-expected economic statistics. The ECB itself recently noted that the prospects for the European economy are much less gloomy than expected.
However many banks warn equity investors against excessive optimism. Banque Postale Asset Management (LBPAM, Banque Postale group) thus judges that the market “got a little carried away just wanting to see the good news” and hastily bet on the “rather optimistic” economic scenario on a possible port to very quiet on both sides of the Atlantic”. For its part, BNP Paribas jokes, judging that the scenario of a “soft landing of the economy” could end up being cast into oblivion as was the “only transitional” inflation scenario a few quarters ago (on which the Fed and the ECB have gambled for a long time).
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Second bank rue d’Antin, the stock market would be vulnerable to a more marked (and therefore disappointing) slowdown in the economy in the coming months. And in this regard, the latest leading indicators for the US economy “have not been good”, warns LBPAM, who points out that the conference board’s leading indicator “has moved widely into recessive territory” and that many commentators “seem to overlook the scope ”.
In addition to rather better than expected economic statistics in Europe (but relatively worse in the UK), the reopening of China (which has turned its back on its zero Covid strategy) “is seen as supporting future global growth”, even if the rebound of the Middle Kingdom’s economy “is happening slowly”. In Europe, the marked decline in gas prices and inflation eases household purchasing power somewhat. Energy shields put in place by governments and budget support provide support to the economy.
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Despite everything, Deutsche Bank points out that the increases in key rates by central banks probably have not yet produced all their (negative) effects on growth. In the eyes of LBPAM, “the rising cost of monetary policy tightening to calm inflationary pressures will initially lead to lower earnings prospects and an adjustment in corporate margins. The question then becomes whether or not this leads to severe adjustments in labor markets”. And this will determine the extent of the deceleration of the economy, judges the asset manager, for whom very soft landings “are possible but not necessarily the most probable”.
To judge the degree of economic deceleration, optimists can nonetheless rejoice in the evolution of the price of copper (nicknamed Dr Copper or “doctor copper”, whose price has been well oriented since the beginning of 2023), considered by economists as one of the main indicators on the state of the economy. In this regard, Ben Laidler, market strategist of eToro, observes that the evolution of the report copper / gold (the price of copper relative to that of gold) is a good barometer of the “recession risk” market. Indeed, while copper has “many industrial applications,” gold is the “oldest and safest financial asset,” explains Ben Laidler.
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According to the expert, “the stability (and even a slight rise, lately, ed) of copper / gold it is another indicator of the resilience of economic growth”, after the rather reassuring purchasing managers’ indexes in Europe, the strengthening of GDP in the United States in the fourth quarter and the reopening of China. This helps “validate the recent equity market rally and allay recession fears,” he says.
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Although the evolution of the copper/gold ratio is relatively encouraging, the global economy has not yet gotten out of the rut at this stage. It is best to remain cautious and closely monitor the evolution of economic statistics and leading indicators in the coming quarters.