Recession Predictions Take a Backseat With US, Germany Promising Recovery

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Could we be heading into a sweet spot of stronger recovery, better job creation and lower inflation in the next year? It might be hard to swallow considering the wall of negative views coming from economic watchers, but in the United States at least there are some clues to better times ahead.

Softening Inflation

Last week’s US employment data for December showed improving labor market conditions with positive hints that wage inflation might be on its way down. Even money markets are starting to moderate their expectations for further US Federal Reserve interest rate tightening. It’s not quite a Goldilocks moment, but it’s better than the doom and gloom predictions which have gripped markets in recent months. There were early indications of recovery in the latest raft of global manufacturing purchasing manager indices (PMI) issued last week. However, it will take more solid performance from the US, China and European economies before the markets are convinced about the case for sustainable global growth.

One big surprise in last week’s data was the improvement in the outlook for German manufacturing. The manufacturing PMI, published by S&P Global, rose to 47.1 in December, from 46.2 in November, the best reading for three months. December’s number was still shy of the 50 threshold, marking the difference between growth and contraction. Companies are reporting an easing in supply-side frictions, resilience in the jobs market and lower inflationary pressures.

Germany, like China, is a machine shop for the rest of the world, so there could be some early glimmers of recovery further afield. On the positive side, seven out of the 29 countries surveyed during December reported manufacturing PMIs in positive territory, including India, the Philippines, Russia, Mexico, Colombia and Indonesia.

Risks Ahead

The JPMorgan S&P global manufacturing PMI fell to a 30-month low of 48.6 in December. It was below the 50-neutral mark for the fourth successive month but still well above the 39.6 low struck at the nadir of the 2020 Covid-19 pandemic. Global business sentiment may seem battered and bruised, but it is by no means down and out. Factors for recovery in the next few months depend heavily on a let-up in the war in Ukraine. Clearly there are risks ahead, but there is no sign of imminent collapse in sentiment. The International Monetary Fund has warned that up to one third of the global economy would slip into recession this year, but the odds are that most of the world is heading into something closer to a moderate downturn rather than the major meltdowns. 

The world needs some time to adjust to tighter monetary conditions and the rise in borrowing costs. On the positive side, the Fed should be in a position to cut interest rates later this year as inflation pressures ease. Lower energy prices should ease the cost-of-living crisis, and growth expectations might well surprise on the upside as global supply-side shortages unwind.

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Source: Scmp