This year is off to a good start for the global economy and financial markets, despite the pessimism about the outlook in the final weeks of 2022.
The S&P 500 index gained more than six per cent last month, the best January in four years, while the UK’s FTSE 100 index reached a record high last week. Markets have rallied on expectations that slowing inflation will allow central banks to pause rate hikes sooner rather than later, and perhaps ease monetary policy in the second half of this year.
However, that optimism on the outlook for rates may be premature, particularly given the relatively robust economic data from the US over the past couple of weeks. January’s job figures showed an astonishing 517,000 new jobs added in the US, almost three times what the market had been expecting, and upward revisions to December’s data as well.
While some of the surprise was due to statistical adjustments that happen every January, the labour market in the US appears to be in rude health despite recent headlines about tech layoffs and weakening economic activity. Wage growth has slowed slightly but at 4.4 per cent year-on-year, remains higher than the Fed would like to see it.
Other survey data for January was also encouraging. One key services sector survey pointed to a rebound in activity in January, although other surveys were more downbeat. The PMI data for the Eurozone and the UK also improved from December.
In the Eurozone, services growth offset the weakness in the manufacturing sector. The story was similar in China, where the Caixin Services PMI moved back into growth territory for the first time since August 2022, as Covid-zero restrictions were eased and people resumed travel within China for the lunar New Year.
While it is still far too early to say that the Fed has managed to achieve its “soft-landing” for the US economy – bringing inflation back down to target without causing a recession – it does appear that this outcome is a little more likely, given the slowing in inflation and still strong labour market. Indeed there is increased optimism that a severe contraction could be avoided in the Eurozone as well.
In its January update to the World Economic Outlook, the International Monetary Fund raised its forecast for global growth in 2023 to 2.9 per cent from 2.7 per cent in the October report, with the forecasts for both US and Eurozone growth looking better than they were a few months ago.
The outlier (not in a good way) among the developed economies was the UK, where the IMF revised its growth forecast lower by almost a full percentage point, making the UK the only developed market expected to see GDP shrink this year.
The IMF expects growth in the Middle East and Central Asia to slow this year after a very strong 2022 performance, and downgraded its forecast for Saudi Arabia on lower expected oil production.
While oil and gas GDP is likely to slow in 2023, Emirates NBD expects the GCC economies to outperform their developed market counterparts this year in terms of growth, driven by strong public sector investment, particularly in Saudi Arabia.
The PMI survey data for January adds support to this view, with the PMI readings for both the UAE (54.1) and Saudi Arabia (58.2) remaining well above the neutral 50-level that separates expansion from contraction.
High oil prices will help to finance the significant domestic investment over the next several years, and this will underpin non-oil sector growth over the medium term.