A turbulent winter but the report needs to be decorated with ribbons: theeconomy global marched better than expected and this made it possible to mitigate, at least in part, the negative effects of inflation, despite the persistence of the conflict in Ukraine, protectionism and growing tensions with China. "This is thanks to the driving force of the ultra-expansionary policies of 2020 and 2021 and to the fiscal and monetary normalization policies that Europe has been conducting for a year together with America", he explains Alessandro Fugnoli, Kairos Strategist, in the latest installment of his podcast on the 4th floor.
Il stock market in turn, from the lows of October, it had a remarkable recovery. In fact, as the Kairos strategist points out, European stock markets have risen by 12% and are close to all-time highs. “The war in Ukraine must be over, we think. We draw confirmation of this from oil, which fell from 113 to 86 dollars and above all from natural gas, which more than halved, going from 94 to 41. The macro indicators are also good. If the Eurozone has seen GDP grow by 3.5% in 2022 and if the estimates for this year are of 1-1.5% growth, it means that there has not been the heavy recession which was seriously feared for the winter that has just ended”.
Yet peace in Ukraine seems a very distant goal. So how are these data possible, despite the massive hike in interest rates (more than sixfold in the last 12 months on the three-month Euribor and doubled on the XNUMX-year Bund)?
The economy is better than expected for now
Fugnoli underlines the difficulty making predictions in a scenario of geopolitical, energy, monetary and fiscal instability. In any case, the improvement in the situation is due: "to the driving force of the ultra-expansionary policies of 2020 and 2021 it was able to support growth and the stock markets, despite the war, protectionism and growing tensions with China, even more than we thought a year ago”; and the "policies of fiscal and monetary normalization that Europe has been conducting for a year together with America have been more careful not to jeopardize growth than the intentions proclaimed by the central banks themselves".
But there is always a price to pay, and that is the inflationary wave. L'inflation, underlines Fugnoli, “was much higher than expected last year and is still well above the levels we would have imagined a year ago”.
Special still observed inflation
All right, then, apart from inflation? “So far yes, as the first quarter earnings that companies are publishing these days are also confirming, also higher than estimates thanks to growth and inflation, which inflates nominal revenues and profits. Also there credit crunch, much feared after the banking crises in March, appears for the moment to be limited to very small businesses and is more an American than a European phenomenon”.
All eyes are now focused on the next meetings of the central banks (Fed and ECB) scheduled for early May.
But Fugnoli warns. “We must not imagine that monetary normalization will be so gradual and soft as to be practically painless. Inflation will come down, but it will still be lively enough to erode the purchasing power of currencies”. In short words the economy will slow down. “Initially the slowdown will be felt above all in the job market, so far made stronger especially by small and very small businesses which, as we have seen, will have less credit availability”.
A modest “recession” on the horizon…
“The slowdown from the labor market will spread to the whole economy to the point of probably causing a recession in the final part of 2023. This deterioration will be very slow and until the autumn it will be hardly noticeable”. What does it mean for the stock markets? “That the second half of the year will be less brilliant than the first. Certainly the fall in inflation and the approach of a cycle of lower interest rates will offer support, but the reduction of rates will have to wait until next year or, if it is this year, it will coincide with the appearance of a be that as it may modest recession".
And so what to do? Fugnoli recommends taking on a gradually more defensive profile in the portfolios, already in the next three months.
