The development of the world is better than expected so far, but Could developed markets enter a recession? That is one of the questions many analysts ask themselves when taking positions to earn future returns. But, beyond that, there are also doubts about the impact on emerging markets. Context is what it is. the developed markets implemented monetary policies to increase interest rates, the fastest in history, in fight the highest inflation in the last 30 years.
This accounts for the seven leading indicators that usually predict economic recession (inversion of the interest rate curve, temporary work credit momentum, real estate prices, Conference Board leading indicator, Duncan Leading Indicator and aggregate corporate earnings growth) decreased at alarming levels. The economy is not coming. At the moment.
The unemployment rate found in the United States at a level of 3.8%which gives the Federal Reserve some room to respond to the turmoil, as happened in the events of Silicon Valley Bank. However, the deterioration of the main indicators is there, and the Doubts are the effect of a cyclical decline in the economy of emerging markets.
According to Gillian Edgeworth, macroeconomic strategist at Managing Wellington, the jury is still out, but overall they consider it “more likely that the current slow growth in developed markets will continue.” In his view, if they fall into a “normal” recession, defined in this context as a quarter-on-quarter contraction between two and four quarters, “most emerging markets can weather the storm relatively well.” “But in such a scenario, we expect emerging market central banks to accelerate rate cuts and focus less on the strength and stability of their money Edgeworth added.
Economic risk
Although the global economy has shown signs of strength in recent quarters, that is likely growth remains slow at best. There is the largest and fastest cycle of interest rate hikes in decades, along with quantitative tightening, and the capacity of financial system to absorb both simultaneously.
Credit growth is slowing in the United States and Europe, while rising the reduction in household savings offers a small margin to strengthen the cycle. Furthermore, any stimulus from China in response to its reopening is unlikely to be the ‘big bang’ it once was.
“Although economic models tend to overestimate the risk of recession – to some extent because the service sector is underrepresented-, history suggests that soft landings are rare (…). Some indicators highlight the growing possibility of negative growth in the coming quarters: for example, our analysis shows that in previous periods the yield curve inversion in The United States took an average of thirteen months to mark the peak of activity,” explained the Wellington Management expert.
In the United States, the yield curve has been inverted for eleven months. There are very few signs of weakness in the labor market. she American unemployment has started to multiply. History suggests that when unemployment is at such low rates, it rises between one and two percentage points twelve months later.
The impact on developing economies
Emerging markets have faced violent changes over the past three decades, but since the creation of the asset class, they have had little or no experience of a standard contraction of German marks. The global financial crisis (GFC) and Covid were bigger disruptions, while in the 2013 taper tantrum and the 2014-2015 commodity price crash, emerging markets were hit hard by their high deficit and their dependence on raw materials.
“If the developed countries experience a more normal recession this time, there will definitely be negative effects for the emerging markets. But, in our view, they are likely to be more is worse than unmanageable to many,” Edgeworth believes.
If there is a recession in the developed markets, the expert predicts that the emerging markets will show the trajectory of the first, with a greater weakened growth and possible contraction, and labor markets are adjusting more than they have done so far. “However, the magnitude of any change in raw material prices should be monitored, with the main exporters of Latin America and South Africa being the most vulnerable,” he concluded.
