Tim Wishart

Over 100 years ago, it was Vladimir Lenin who famously said: “There are decades where nothing happens; and there are weeks where decades happen.”

Already, 2023 has felt like one of the latter periods, contributing towards a decade that has earned the moniker the ‘turbulent twenties’ compared with the previous decade, which could have been called the ‘easy tens’.

The world is a complicated place. We have sadly left behind this decade of relative macroeconomic predictability – even if it didn’t seem so at the time – and entered a period in which we are experiencing a completely new paradigm for economic growth, government debt, inflation and monetary policy.

Mix in worsening geopolitical tensions between the US and China, the war in Ukraine, increasing societal unrest and, of course, the pandemic itself, and we are left with a recipe for volatile outcomes in the global economy and financial markets.

Throughout the latter stages of 2022, our chief investment office often described the global economy as being in a ‘twilight zone’, where it was particularly perilous to forecast the immediate outlook.

We weren’t the only commentators unable to achieve precision, and towards the end of last year the investment industry was split on a variety of different economic outcomes for 2023.

While we still can’t be totally certain, in the short term it appears that the global economy is managing to avoid the worst-case scenarios predicted for it towards the end of 2022. Looking much further into the future is harder.

The words we at Adam & Company have most often used to describe the global economy this year are ’confusing‘, ’complicated‘ and ’contradictory‘.

One of the fascinating dynamics is the different experiences of the three key economic regions, namely the US, Europe and China-led Asia. We are witnessing a rare decoupling and desynchronisation of economic fortunes, due to the after-effects of the pandemic and the different problem-solving approaches taken by governments and central banks in those areas.

The US is clearly slowing down towards ’stall speed‘, with a range of conflicting factors influencing economic growth, and we expect very slow or no growth for the rest of the year.

Unfortunately, we cannot tell with any certainty how the effects of the rapid rise in interest rates seen in the last year will affect the American economy.

We have already seen recessions in those sectors most sensitive to rising rates, such as housing, and those susceptible to weakness in the face of US dollar strength, most obviously manufacturing and certain exports.

For now, the US consumer is still in fine health, with some lingering savings from the pandemic available and a tight jobs market providing confidence. How long those powerful factors behind consumption will persist is open to question and something we are monitoring closely.

The news from Europe has been significantly better than most pundits were expecting, not least because a warm winter has allayed fears of energy blackouts and an industrial recession.

We should also note that the pandemic recovery programmes are only now starting to ramp up across the Channel, which should support growth later this year.

Given its heavy reliance on exports, Europe would have suffered from a continuation of China’s zero Covid-19 policies.

However, it now appears more certain that China has started to reopen rapidly, with the Xi administration completely abandoning their previous zero tolerance approach, which was a major hindrance to economic activity at home and abroad.

This is a big deal for global economic growth, even if the recovery in China is unbalanced. The initial recovery has been more focused on industrial activity over consumption, with confidence among Chinese citizens still understandably brittle.

In short, we think that the combined growth of the global economy is unlikely to be very strong and will be unbalanced, but it is certainly better than many feared a few months ago.

We hoped that by this time we would have a clearer line of sight over the investment landscape, and that some of the questions we were pondering at the end of 2022 would be definitively answered.

We should have remembered that the pursuit of certainty is an impossibility in financial markets and, as Voltaire magnificently wrote: “Uncertainty is an uncomfortable position, but certainty is an absurd one.”

It is difficult to predict precisely how the economy will fare, whether inflation will settle or what central bankers might do.

We believe that our base case of very low growth, subsiding inflation and interest rates on hold is sensible – but operating with an open mind will be vital.

Tim Wishart is head of strategy and development for Adam & Company