Invesco releases 2023 Midyear Investment Outlook

• Base case anticipates a “bumpy landing” in the US – relatively brief and shallow economic slowdown, followed by recovery.
• US rate hikes are likely ending and US inflation will continue to fall; US is likely to avoid a substantial broad-based recession.
• Eurozone and UK likely to follow similar pattern to the US, but with a lag.
• China faces “bumpy take-off” – uneven and weaker-than-hoped recovery but maintains robust growth outlook with subdued inflation.

Hong Kong, 3 July 2023 – Invesco, one of the world’s largest global asset managers, today released its 2023 Midyear Investment Outlook (link) with insights on the near-term expectation for global markets through the remainder of the year.  The views are based on the contributions from across Invesco’s Global Market Strategy team and investment experts from the Americas, Europe, Middle East & Africa, and Asia Pacific. 

The Outlook explores three possible scenarios, but the base case anticipates a relatively brief and shallow economic slowdown as inflation continues to moderate and monetary policy tightening nears an end, followed by a recovery. This may be labelled a “bumpy landing” because there will continue to be some economic damage in this scenario. A “hard landing” remains a possibility, in which global growth is hit harder due first to a US recession which then cascades into other economies. Conversely a “smooth landing” is an upside scenario, in which monetary policy impacts growth less than expected and the global economy is relatively unscathed.

Kristina Hooper, Chief Global Market Strategist at Invesco, comments: “We believe we are at a policy peak, that disinflation is underway, and that a relatively brief global economic slowdown is occurring, but markets are likely to soon look past this and begin to discount a future economic recovery.”

The Outlook expects the Eurozone and UK to follow a pattern similar to the US, but with a lag. A variety of forces have helped sustain European economic momentum so far in 2023, but tightening financial conditions will likely weigh on credit growth, helping to reduce inflationary pressures but also causing a significant economic slowdown.

Meanwhile, in contrast to many major developed markets, China is in a markedly different place in its cycle. The relaxation of COVID-19 restrictions has driven a meaningful though uneven recovery. The reopening is largely benefiting the services component of the economy while slowing growth momentum globally has meant weaker-than-hoped manufacturing activity.

Kristina continues: “In the US, we believe rate hikes are ending and inflation will moderate further, and we continue to believe the US is likely to avoid a substantial broad-based recession. We do expect some weakness in the second half of this year as policymakers accomplish a bumpy landing, but we anticipate activity will nevertheless remain relatively resilient.”

“Bumpy landing” for Western developed markets, late in cycle

The Outlook asserts that global growth is below trend and slowing for Western developed economies, and while a broad-based recession is a risk, it is not assumed in the base case. Demand is already slowing in many major economies, credit conditions are tightening, and in some economies — notably the US — inflation is already on a downward trajectory.

Goods consumption, which boomed in the post-pandemic period, is slowing while services consumption continues to be relatively strong. The easing of supply chain pressures has facilitated the softening of goods' price pressures, although manufacturing is expected to remain weak until monetary policy begins to loosen.

Services demand meanwhile remains strong, reflecting the post–pandemic ongoing recovery in services as well as the underlying strength of the labor markets in Western economies. Easing energy prices have also been supportive.

Kristina notes: “While credit standards have tightened and the yield curve has been inverted for some time, activity has remained resilient, and labor markets have remained tight. We expect some weakness in the second half of this year as policymakers accomplish a bumpy landing, which may or may not precipitate a mild recession in the back half of 2023.”

“Bumpy take-off” in China, a mixture picture for other emerging markets

In China, the relaxation of COVID-19 restrictions beginning in late 2022 has driven a meaningful but less rapid than expected recovery in Chinese growth. Services activity has seen the most pronounced pick-up while slowing global growth has meant softer industrial production and exports.

The Outlook argues that China’s near-term outlook remains favorable, as growth should accelerate in the second half of 2023, inflation is well-anchored and monetary policy remains accommodative. Policymakers may soon set policies to reinvigorate the property market and counter demographic headwinds.  More proactive measures from the PBoC could be expected, such as cuts to the reserve requirement ratio (RRR) to boost household and business sentiment.

Leading indicators suggest a mixed near-term outlook for other emerging market economies. As with China, the outlook appears to be improving in Mexico and Turkey while stabilizing in Brazil. Deterioration may continue in South Africa and begin in India, the latter perhaps cooling after a period of strong performance.

US rates are at their peak; more hikes in Europe

In the US, after a rapid tightening cycle, the Outlook maintains that the Fed is at or near its terminal rate, with inflation likely ending the year closer to 3% rather than the Fed’s 2% target. Some marginal rate cuts may start before the end of 2023 but are far more likely in 2024; policy rates are nevertheless likely to remain elevated, despite repricing lower after banking failures earlier this year.

As mentioned, the eurozone and the UK are likely to follow a pattern similar to the US but with a lag. In the eurozone and the UK, rates expectations have moved higher as inflation data has emerged as more persistent than initially anticipated.  European growth should remain relatively positive in the near term but region-specific challenges will likely re-emerge later in the year. Tightening financial conditions will likely weigh on credit growth over time, helping to reduce inflationary pressures. The BOE and ECB are likely to continue hiking, but the ECB terminal rate is likely to be lower than in the US.

Potential risks

The Outlook points to key risks that remain elevated following the latest central bank tightening cycle, including financial risks that resulted in several high-profile banking failures in the first half of 2023. Such risks raise the probability that central banks will likely have to pivot to an easing regime more quickly, perhaps leading to an eventual transition to a recovery regime.

Risks facing US commercial real estate are also noteworthy.  Aggressive Fed rate hikes caused a rapid rise in mortgage rates, which along with a broader tightening of credit conditions exerted downward pressure on commercial real estate prices.  While continued downward pressure on real estate prices in the near term is expected, commercial mortgage rates may lower and credit conditions may improve through 2024, at which time a significant portion of commercial real estate loans mature and need to be refinanced.

Kristina concludes: “China remains a bright spot with subdued inflation and a robust growth outlook. As we enter 2024, we expect a more positive growth outlook to unfold as the US economy recovers, followed by Europe.

“Geopolitical risks remain a key concern. One indicator of recent tensions may have been the jump in central bank purchases of gold during 2022, which could help explain how gold has stood up in the face of rising bond yields and a stronger dollar.  Inflation may have influenced these central bank purchases, but we suspect there is also some desire to diversify away from USD holdings after the start of the Russia-Ukraine conflict.”

About Invesco

Invesco is an independent investment management firm dedicated to delivering an investment experience that helps people get more out of life. NYSE: IVZ; www.invesco.com.

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