Investment Institute
Viewpoint Chief Economist

Growing, (too) Fast and (too) Slow

  • 28 August 2023 (10 min read)

Key points:

  • Markets had a “grumpy August”. Bond yields rose in response to the US still growing too fast, while the confirmation of deflationary risks in China – and the lack of policy response - dampen investors’ animal spirits.
  • Euro area softness extends beyond Germany

In our latest Macrocast on 31 July we had left our readers with a – probably typically – pessimistic note, describing the short-term outlook for the Euro area as a “hardish landing” and expressing doubts on a soft landing being all what it is going to take to tame inflation in the US. We don’t feel chirpier after a few weeks’ rest and unfortunately it now seems the markets are also looking somewhat downbeat. As of Friday 26 August, the S&P500 was down nearly 4% on the month while the Dax lost a bit more than 5%. Summer markets can be fickle, and there has already been some rebound from the lows hit around 20 August, but investors’ caution could be justified as the world economy is having to deal with two unrelated headwinds. The confirmation of the resilience of the US economy is putting to rest the market’s hopes of a swift reversal of the Fed’s policy stance, which has pushed long-term yields further up, while the scenario of a “deflation trap” in China is getting more substantiated by the recent dataflow, with only timid policy response from Beijing so far. In a nutshell, economies are growing either “too fast” or “too slow”.

There is not one single “paradigm” explaining cyclical conditions across the main economic regions now. For China, Rogoff’s “debt supercycle” model is persuasive – but then the PBOC should react by engaging in more decisive rate cuts, to ease the pain of the balance sheet adjustment while structural reforms deal with the persistent imbalances in Real Estate. For the US, Charles Goodhart’s focus on a reversal of the balance of power on the labour market provides an interesting model.  

Europe finds itself faced with the double whammy of slower Chinese demand and some contagion from higher interest rates from the US which compound the ECB’s tightening. A new concerning development is that business confidence is deteriorating markedly outside Germany, affecting countries which so far had been performing rather well, such as France.

Growing, (too) Fast and (too) Slow
Download full insight (512.52 KB)

Related Articles

Viewpoint Chief Economist

Taking the Plunge

Viewpoint Chief Economist

The (welcome) Return of Boring

Viewpoint Chief Economist

Independence Wars Ahead?

    Disclaimer

    This document is for informational purposes only and does not constitute investment research or financial analysis relating to transactions in financial instruments as per MIF Directive (2014/65/EU), nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy or sell any investments, products or services, and should not be considered as solicitation or investment, legal or tax advice, a recommendation for an investment strategy or a personalized recommendation to buy or sell securities.

    It has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. Its analysis and conclusions are the expression of an opinion, based on available data at a specific date.

    All information in this document is established on data made public by official providers of economic and market statistics. AXA Investment Managers disclaims any and all liability relating to a decision based on or for reliance on this document. All exhibits included in this document, unless stated otherwise, are as of the publication date of this document.

    Furthermore, due to the subjective nature of these opinions and analysis, these data, projections, forecasts, anticipations, hypothesis, etc. are not necessary used or followed by AXA IM’s portfolio management teams or its affiliates, who may act based on their own opinions. Any reproduction of this information, in whole or in part is, unless otherwise authorised by AXA IM, prohibited.

    Issued in the UK by AXA Investment Managers UK Limited, which is authorised and regulated by the Financial Conduct Authority in the UK. Registered in England and Wales No: 01431068. Registered Office: 22 Bishopsgate London EC2N 4BQ

    In other jurisdictions, this document is issued by AXA Investment Managers SA’s affiliates in those countries.

    Are you a Professional Investor ?

    This website is available in English only and directed at professional, institutional or qualified investors. It is not suitable for retail investors. As such, some of the funds, products and services described on this website are not available for retail investors under the MiFID II (Directive 2014/65/UE). By pressing accept you confirm that you are a professional investor and agree to AXA Investment Managers' Legal Information and Terms of Use.