Skip to main content

Our macro house view : soft landing is becoming more complicate

Key points at a glance

  • Growth will moderate globally with an increased risk of stagflation and recession.
  • Inflation to remain higher for longer with risk of entrenched inflation and second round effects.
  • Tighter monetary policy (almost) worldwide in the attempt to keep the lid on inflationary expectations and reduce the risk of price-wage spirals. Fiscal policy could provide useful support to avoid recession.
  • Risks of policy mistakes are elevated, particularly in the US.
  • Soft landing still possible but becoming more and more complicated.

“The strong post-Covid recovery is history.”

The global economy is at a difficult juncture and uncertainty is very high. Against a background of slowing growth, persistent inflation and tighter economic policies, the war in Ukraine and the Covid outbreak in China are serious stagflationary shocks challenging policymakers and threatening economic growth.

The downside risks for the global economy have increased considerably since the first quarter. The baseline scenario for the global economy has been downgraded to reflect slower growth and higher inflationary pressures. The IMF has revised down its baseline scenario for global growth in 2022 from 4.4% in its January forecast to 3.6%. The inflation forecast is now at 5.7% for advanced economies and at 8.7% for emerging economies for 2022.

The war in Ukraine and consequent western sanctions and the Covid-related lockdowns in China represent a combined negative supply and demand shock resulting in higher energy and commodity prices, softening consumer and business confidence, supply chain constraints and international trade disruptions. Without a solution to these exogenous shocks, growth expectations could be revised further downwards in the coming months.

Purchasing Managers Indexes (PMIs) confirm the softening momentum for the second quarter of the year. The April global composite PMI fell to 51 (from 52.7 in March) with an even bigger drop in the services sector. Supply chain constraints and price pressures remain elevated. Growth prospects are divergent across regions as a result of asynchronous cycles, divergent economic policies and because countries are differently affected by the conflict in Ukraine and the consequent energy shock.

Focus: the US economy

Due to the widening trade deficit and weak inventory accumulation, the US economy contracted -1.4% annualised during Q1 2022. However, consumer demand and business investments remain solid. The labour market is very strong with unemployment at 3.8% and wages rapidly increasing. Inflation is high and sticky with headline inflation at 8.3% and core inflation at 6.2% in April but there are tentative signs that it may be close to peaking.

The Fed started an aggressive tightening cycle that will likely bring the Fed funds to the estimated neutral rate of approximately 2.5% by year end, and it just started its quantitative tightening. With a solid economy and strong employment, the Fed sees the possibility of a soft landing and it is convinced that it has room to tighten policy and reduce aggregate demand without causing a recession.

It is still unclear whether the Fed will be able to bring inflation to its target without causing a recession. However, there is little doubt that the Fed will tighten its policy until inflation is brought under control.

Focus: the Eurozone

The Eurozone picture looks gloomier. The Eurozone’s economy grew during the first quarter of the year at a slow pace of +0.3% quarter on quarter. As a result of the conflict in Ukraine, the European Commission revised its forecast for 2022 growth from 4% down to 2.7%. Lately, economic data have shown a mixed picture. PMIs have stabilised at a low level in May after a sharp fall in March. The labour market remains solid with the unemployment level at 6.8% and moderate increases in salaries. Below the surface, however, we are seeing the effects of the conflict in Ukraine and high energy prices. Economic confidence is eroding sharply, industrial production is plagued by supply chain disruptions and high energy prices, and orders are declining.

Inflation reached in May an all-time high of 8.1% and core consumer price inflation (CPI) is picking up at 3.8%. Energy and food prices are pushing inflation higher but inflation is now broadening to other sectors. The ECB turned more hawkish to keep the lid on inflationary expectations while fiscal policy will remain broadly accommodative in 2022. The ECB will conclude its asset purchase programme in June 2022 and will very likely increase its policy rates in July with the aim of bringing its policy rate to zero by year end. There are however considerable risks that the ECB will raise rates in a slowing economy and that tighter policy will have little effect on inflationary pressures as they are emanating primarily from high energy and commodity prices. Market fragmentation (spreads between the centre and the periphery) is an additional worry for the ECB, which will necessitate a flexible approach.
We think that the ECB will likely not be able to raise rates as much as currently expected by the markets. Despite the optimism related to the economic reopening and the beginning of the tourism season, headwinds from the conflict in Ukraine, higher inflation, and the economic slowdown in China will continue to hamper economic performance in the Eurozone.

Focus: China

In China the economy has been slowing for some time. Despite a temporary rebound during the first couple of months of 2022, the new outbreak of Omicron and the zero-Covid policy have caused widespread lockdowns. As a consequence, economic activity has been greatly disrupted. Thanks to a strong beginning of the year and policy support GDP expanded +4.4% y/y, but the economy remains on a weakening trend and has undergone a sharp contraction in April. The National People’s Congress has pledged strong policy support and the China State Council has announced an impressive set of measures to prevent an excessive economic slowdown.

With inflation low and moderating (headline CPI at 2.1%) and soft consumer demand the People's Bank of China (PBoC) is accelerating the provision of liquidity and reducing rates to support the economy. Fiscal policy will continue to be very accommodative. We believe that policy support will progressively start to have an effect and will likely impact economic growth in the second half of 2022 at the earliest.

China is however struggling to combine its health policy aimed at strictly containing the Covid outbreaks with support for its flagging economy. With President Xi Jinping aiming for a third term as General Secretary of the Chinese Communist Party, we expect this tension to continue until the fourth quarter of the year and the Chinese economy to struggle to achieve the official 5.5% GDP growth target for this year.

Will the advanced economies in the US and the Eurozone be able to achieve a soft landing and avoid a recession?

Headwinds for the economies are growing, increasing the downside risks and narrowing the path to a soft landing. Several factors will play a role in determining the course of events:

  1. The duration of the armed conflict in Ukraine and its effect on commodity prices, economic confidence, investments, and production.
  2. The effects and duration of the Covid situation in China with respect to supply chain issues and domestic demand as well as their effects on inflation and global growth.
  3. Labour markets and consumer spending, as consumers are feeling a significant squeeze on their real disposable income due to rising inflation.
  4. The macroeconomic policy mix: with tighter monetary policies worldwide (notable exceptions are China and Japan), will fiscal policies help to prevent a further recession?

Facing a major stagflationary shock and with greater dependence on Russian energy and little fiscal room, the EU is at risk of recession. With a stronger economy and less affected by the conflict in Ukraine, the US economy is better equipped to prevent a recession. The path for the Fed is however extremely narrow and the risk of policy misstep (excessive tightening) should not be underestimated.

This is a marketing communication. This document is marketing material and is for product information purposes only and is not a mandatory statutory or regulatory document. The information contained in this document does not constitute a solicitation, offer or recommendation to buy or sell units in the fund or to engage in any other transaction. It is intended solely to provide the reader with an understanding of the key features of the fund, such as the investment process, and is not deemed, either in whole or in part, to be an investment recommendation. The information provided is not a substitute for the reader's own deliberations or for any other legal, tax or financial information and advice. Neither the investment company nor its employees or Directors can be held liable for losses incurred directly or indirectly through the use of the contents of this document or in any other connection with this document. The currently valid sales documents in German (sales prospectus, KIIDs and, in addition, the semi-annual and annual reports), which provide detailed information about the purchase of units in the fund and the associated opportunities and risks, form the sole legal basis for the purchase of units. The aforementioned sales documents in German (as well as in unofficial translations in other languages) can be found at www.ethenea.com and are available free of charge from the investment company ETHENEA Independent Investors S.A. and the custodian bank, as well as from the respective national paying or information agents and from the representative in Switzerland. These are: Austria: ERSTE BANK der österreichischen Sparkassen AG, Am Belvedere 1, A-1100 Wien; Belgium: CACEIS Belgium SA/NV, Avenue du Port / Havenlaan 86C b 320, B-1000 Bruxelles; France: CACEIS Bank France, 1-3 place Valhubert, F-75013 Paris; Germany: DZ BANK AG, Deutsche Zentral-Genossenschaftsbank, Frankfurt am Main, Platz der Republik, D-60265 Frankfurt am Main; Italy: State Street Bank International – Succursale Italia, Via Ferrante Aporti, 10, IT-20125 Milano; Société Génerale Securities Services, Via Benigno Crespi, 19/A - MAC 2, IT-20123 Milano; Banca Sella Holding S.p.A., Piazza Gaudenzio Sella 1, IT-13900 Biella; Allfunds Bank S.A.U – Succursale di Milano, Via Bocchetto 6, IT-20123 Milano; Liechtenstein: SIGMA Bank AG, Feldkircher Strasse 2, FL-9494 Schaan; Luxembourg: DZ PRIVATBANK S.A., 4, rue Thomas Edison, L-1445 Strassen; Spain: ALLFUNDS BANK, S.A., C/ stafeta, 6 (la Moraleja), Edificio 3 – Complejo Plaza de la Fuente, ES-28109 Alcobendas (Madrid); Switzerland: Representative: IPConcept (Schweiz) AG, Münsterhof 12, Postfach, CH-8022 Zürich; Paying Agent: DZ PRIVATBANK (Schweiz) AG, Münsterhof 12, CH-8022 Zürich. The investment company may terminate existing distribution agreements with third parties or withdraw distribution licences for strategic or statutory reasons, subject to compliance with any deadlines. Investors can obtain information about their rights from the website www.ethenea.com and from the sales prospectus. The information is available in both German and English, as well as in other languages in individual cases. Producer: ETHENEA Independent Investors S.A.. Distribution of this document to persons domiciled in countries in which the fund is not authorised for distribution, or in which authorisation for distribution is required, is prohibited. Units may only be offered to persons in such countries if this offer is in accordance with the applicable legal provisions and it is ensured that the distribution and publication of this document, as well as an offer or sale of units, is not subject to any restrictions in the respective jurisdiction. In particular, the fund is not offered in the United States of America or to US persons (within the meaning of Rule 902 of Regulation S of the U.S. Securities Act of 1933, in its current version) or persons acting on their behalf, on their account or for the benefit of a US person. Past performance should not be taken as an indication or guarantee of future performance. Fluctuations in the value of the underlying financial instruments or their returns, as well as changes in interest rates and currency exchange rates, mean that the value of units in a fund, as well as the returns derived from them, may fall as well as rise and are not guaranteed. The valuations contained herein are based on a number of factors, including, but not limited to, current prices, estimates of the value of the underlying assets and market liquidity, as well as other assumptions and publicly available information. In principle, prices, values, and returns can both rise and fall, up to and including the total loss of the capital invested, and assumptions and information are subject to change without prior notice. The value of the invested capital or the price of fund units, as well as the resulting returns and distribution amounts, are subject to fluctuations or may cease altogether. Positive performance in the past is therefore no guarantee of positive performance in the future. In particular, the preservation of the invested capital cannot be guaranteed; there is therefore no warranty given that the value of the invested capital or the fund units held will correspond to the originally invested capital in the event of a sale or redemption. Investments in foreign currencies are subject to additional exchange rate fluctuations or currency risks, i.e. the performance of such investments also depends on the volatility of the foreign currency, which may have a negative impact on the value of the invested capital. Holdings and allocations are subject to change. The management and custodian fees, as well as all other costs charged to the fund in accordance with the contractual provisions, are included in the calculation. The performance calculation is based on the BVI (German federal association for investment and asset management) method, i.e. an issuing charge, transaction costs (such as order fees and brokerage fees), as well as custodian and other management fees are not included in the calculation. The investment performance would be lower if the issuing surcharge were taken into account. No guarantee can be given that the market forecasts will be achieved. Any discussion of risks in this publication should not be considered a disclosure of all risks or a conclusive handling of the risks mentioned. Explicit reference is made to the detailed risk descriptions in the sales prospectus. No guarantee can be given that the information is correct, complete or up to date. The content and information are subject to copyright protection. No guarantee can be given that the document complies with all statutory or regulatory requirements which countries other than Luxembourg have defined for it. Note: The most important technical terms can be found in the glossary at www.ethenea.com/glossary Information for investors in Switzerland: The country of origin of the collective investment scheme is Luxembourg. The representative in Switzerland is IPConcept (Schweiz) AG, Münsterhof 12, P.O. Box, CH-8022 Zurich. The paying agent in Switzerland is DZ PRIVATBANK (Schweiz) AG, Münsterhof 12, CH-8022 Zurich. The prospectus, the Key Investor Information Document (KIID), and the Articles of Association, as well as the annual and semi-annual reports, can be obtained free of charge from the representative. Copyright © ETHENEA Independent Investors S.A. (2022) All rights reserved. Munsbach, 02/06/2022