The Markets 360 analysts think the global economy will have to catch its breath over the next few quarters as monetary policy weighs on demand and post-pandemic buffers wear down. The last mile is likely to be the hardest for inflation, but we do expect a return to central bank targets, albeit over a long period and with the risks skewed to the upside. In this environment, we are broadly bearish on risky assets, but see potential upside in EM and China.
Luigi Speranza, Head of Markets 360 and Chief Economist
Growth struggles
The Markets 360 analysts continue to expect a recession in the US, albeit mild by historical standards. Over the same period, they expect the eurozone economy to stagnate, as activity in the service sector declines while the outlook for manufacturing is already weak, but consumer support should prevent a recession.
The recent stimulus package in China is likely to lift growth in Q4, but the recovery looks set to remain shallow and leave growth overall weaker next year than this year.
Across advanced economies, Japan appears to be the exception, as the post-pandemic rebound combines with a persistently stimulative fiscal stance, while the weaker yen should somewhat shield exports from the global slowdown.
The picture for developed markets challenges recent resilience in emerging markets, pointing to relatively tepid growth overall. The Markets 360 EM analysts expect Latam to outperform thanks to the scope for rate cuts, and CEEMEA to underperform on stickier inflation.
Inflation coming back down to base camp
Markets 360’s base case is that the slowdown in global growth it expects will be sufficient to take inflation back to central banks’ targets, but over a relatively long period and with the risks to the upside.
Some of the buffers that have supported growth to date might remain relevant for longer than they currently anticipate which, combined with a number of structural forces and more elevated price expectations, could make the disinflation process slower than in their base case.
Calling the policy peak
These risks will continue to provide arguments for the hawks, leaving the debate on peak rates open in the near term. That said, provided growth and inflation move in the same direction as the analysts expect, ultimately central banks are likely to be increasingly sensitive to the risk of overdoing the tightening.
The Markets 360 economists think the Federal Reserve and the ECB have already achieved their peak in policy rates, but expect a reluctance to cut rates any time soon – the Fed is likely to start easing in mid-2024 and the ECB in September of that year.
Once again, Japan should prove the exception. With inflation expectations likely to have risen, the Bank of Japan is likely to remove negative rates next spring, or possibly earlier if the currency continues to weaken.
Markets losing steam
The mix of slowing activity, central-bank reluctance to come to the rescue and relatively high valuations is challenging for risky assets. The Markets 360 team is broadly bearish on equity and credit in developed markets, with room for upside in EM and China. They expect core bond yields to reach their peak and are moderately and selectively bearish on the US dollar. In emerging markets, Latam FX and rates could outperform.
Demand to weigh on commodities
While Brent prices are likely to remain supported in the near term, the Markets 360 commodity analysts expect prices to fall in Q4 on slower demand and a moderation of supply cuts. Sluggish demand will also weigh on base metals, they think, while the outlook for gas remains subject to an unusually high degree of uncertainty and therefore volatility.
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