Key market indicators are suggesting aggressive monetary policy tightening from the world’s central banks are achieving their purpose of curbing inflation.
However, the impact of higher interest rates on consumer sentiment is expected to tip developed economies into recession.
But according to Tamara Basic Vasiljev, senior economist at Oxford Economics, recent trends could be pointing to a softer landing.
Oxford Economics has projected a “shallow global recession” in the first half of 2023, but Ms Vasiljev has now conceded that uncertainty over the forecast is “higher than usual”.
In her latest analysis, she has claimed recessionary risks now seem “skewed to the upside”, with key economic indicators, or “nuggets”, suggesting the recession could be “avoided altogether”.
Such indicators include early reductions in interest rates across both corporate and household credit, which have “turned lower” since October and November in both the US and Europe.
“That commercial rates would move ahead of policy shifts is not unheard of, but this time around, the change has come unusually early,” Ms Vasiljev said.
“Falling rates are probably partly a consequence of high global liquidity. Though the credit cycle turned negative at the end of 2022, it appears to be stabilising with Europe and perhaps also China exiting a short deleveraging phase.”
Additionally, balance sheets are “still flush with the abundance of excess cash” off the back of the recovery from the COVID-19 pandemic.
“Though the majority of savings is concentrated in the upper percentiles of the income distribution, the poorest families, too, are much better off than pre-crisis — the bottom 40 per cent still have a quarter of a trillion dollars more at their disposal (a five-fold increase compared to 2019),” Ms Vasiljev noted.
Resilience in emerging markets (EM) has also been cited as a “source of optimism”, with “prudent policy and macro stability” helping facilitate a recovery.
“There will be a price to pay for the slowdown in advanced economies. But so far, EMs appear to be weathering the storm very well,” the Oxford Economics analyst added.
Ms Vasiljev pointed to previous forecasts regarding the fate of the global economy during the height of the COVID-19 pandemic, adding that markets may be proven wrong for the second time in less than three years.
“Though a ‘new year, new beginning’ does not necessarily mean you should start being enthusiastic again, we think there might be nuggets of hope out there you might want to consider,” she said.
“Sentiment indicators are largely yet to provide reasons for optimism, but they are an indicator of change, not level, and thus struggle in times of big change.
“Throughout the pandemic crisis and recovery, sentiment has overestimated damage and underestimated recovery.”
