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Economic Overview

Published 13 December 2022

Economic Overview

Global Economy

The global economy has been heavily buffeted this year by inflationary pressures that have been steadily slowing growth. Last year, according to the International Monetary Fund (IMF), the world economy grew by 6.0%, as it rebounded from the previous year’s pandemic-induced recession, the most severe since the Second World War and which saw the global economy contract by 3.0%. In its latest report (October 2022), the IMF is forecasting real (inflation adjusted) global growth to be 3.2% this year and then only 2.7% in 2023, with ‘the balance of risks firmly tilted to the downside’. The advanced economies as a group are forecast to grow by 2.4% this year and then only 1.1% next year, with US growth expected to be 1.6% in 2022 and only 1.0% in 2023. Growth in the Euro zone (3.1% this year and only 0.5% in 2023) and in Japan (1.7% and 1.6%) is also expected to be less than robust. Most of the developing world is also facing stresses, with China forecast to expand by only 3.2% this year and 4.4% in 2023, although India is expected to grow more rapidly, with growth rates forecast to be 6.8% and 6.1% over this period.

This general forecast of weak but still positive global growth is predicated on economies being able to overcome what the IMF terms ‘steep challenges’, these being ‘the lingering effects of three powerful forces: the Russian invasion of Ukraine, a cost-of-living crisis caused by persistent and broadening inflation pressures, and the slowdown in China’. The IMF also notes that ‘more than a third of the global economy will contract this year or next, while the three largest economies – the United States, the European Union and China – will continue to stall. In short, the worst is yet to come’.

This slowdown is being hastened by a rapid tightening of monetary policy, including hefty interest rate increases that the IMF argues ‘will work their way through the economy, weighing demand down and helping to gradually subjugate inflation’.

Investor Opportunities

It is important to keep market declines in perspective as global share markets have until recently enjoyed a long bull run. Over the full 2021 calendar year, major market rises included 27% for the broad US market, 21% for the Nasdaq, 14% for the UK, 16% for Germany, 29% for France, 5% for Japan, 5% for China, 22% for India and 13% for the Australian market. Furthermore, these strong rises followed a very strong bull market through 2019 and 2020 in most cases. As such, by the start of this year some markets had been looking quite fully valued.

This year has seen significant declines for many of the major markets but this means that many stock markets are now more attractively priced than previously and appear better value than other investments, such as bonds or cash. Looking ahead, this recent market correction, although mostly the result of tragic circumstances, could offer an opportunity for investors focused on longer-term returns to access markets that may have already ‘priced in’ much of the negative news.

Stay invested

Our advice to investors is to stay well diversified across asset sectors such as through our diversified funds, which comprise the Fiducian Capital Stable, Balanced, Growth and Ultra Growth Funds. Certainly, now is not a time to panic, to sell out in haste and to potentially realise capital losses in some cases. We believe that it is better to stay invested and ride through the current period of market correction, after which share markets could potentially resume an upwards trajectory in time. We also strongly advise against trying to pick the bottom of this market.