the United States and the European Union will not avoid recession (and the central banks will not cut their rates).

The messages that have come in recent days from the World Economic Forum of the Powers of the Earth, which is being held in Davos, are reassuring: the probability of a global recession is diminishing, as declared by the President of the ECB, Christine Lagarde, and IMF Managing Director One Kristalina Georgieva. But Blackrock, the world’s largest asset manager, remains convinced that there will be a downturn and more importantly that central banks will do nothing when the downturn materializes as the focus will remain on inflation. The macro and market outlook report for 2023 prepared by the asset management giant’s Investment Institute, in its special edition for Davos, leaves no room for doubt from the title “Reversals, but recession without rescue”.

1% decrease

Some of the things that weighed on markets last year are changing now, Blackrock experts say, “that doesn’t mean recession in the US and Europe can be avoided.” The group expects “a contraction of 1% in both areas, and this as the delayed effects of rate hikes come up against other factors, including the depletion of consumer savings due to the pandemic. in the United States and the energy shock in Europe”. But in this context, according to Blackrock, central banks will not be of much support when the recession takes hold. “Contrary to market expectations, we do not expect any rate cuts from the Fed or the ECB in 2023, although inflation is expected to come down significantly this year as energy and commodity prices fall. .” Central banks, according to Blackrock, “will need to be convinced that inflation can fall back to 2% before reversing, and we still believe that persistent wage pressures will prevent this”.

Emphasis on the labor market

The extent of these pressures will be key to understanding where inflation will take hold. This is why labor markets deserve particular attention this year. “The current strong wage pressures are due to a shortage of labor supply: in the United States, due to the aging of the population and, in Europe, due to the expansion of the public sector, which reduces the pool of workers available to the private sector. This is not a sign of economic strength, as some have interpreted, and the labor shortage is unlikely to ease anytime soon,” the study said. Who warns: “We believe that the markets will be disappointed when it is clear that the fall in inflation does not mean that the recession can be avoided and that the central banks will not cut their rates. As markets adjust to the reality of recession and above-target inflation, the conditions for a more constructive environment will be created.”

China’s (temporary) rebound

With lockdowns ending quickly, Blackrock expects China’s economy to rebound 6% this year, but warns that growth of this magnitude will not be sustainable. “It is important to keep in mind that our forecast for growth of over 6% in 2023 reflects the one-time event of reopening. Once this phenomenon ends, we expect future growth to average significantly below pre-pandemic rates. We estimate that the country’s potential growth rate may have fallen below 5% and could fall further to around 3% by the end of the decade.” The reasons ? “First of all, the working-age population, after growing rapidly, is shrinking, but also due to international trade restrictions as well as stricter regulations for companies operating in China, two factors that will slow down productivity growth”. ()

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