The global economy has proven to be surprisingly resilient in the face of sharp interest rate increases from central banks over the past two years. Despite the potential for a collapse, major economies, especially the United States, have managed to avoid a recession and maintain a strong labor market. This resilience has led to a shift in focus towards rate cuts as inflation continues to decrease and growth slows. Steven Wieting, chief investment strategist and chief economist at Citi Global Wealth, believes that an “economic collapse” is not necessary to rein in inflation. Wieting asserts that the negative effects on manufacturing and trade are likely to bottom out within the year.
In December, U.S. headline inflation was at an annual rate of 3.4%, above the Federal Reserve’s target of 2% but significantly lower than a peak of 9.1% in June 2022. The upcoming personal consumption expenditure (PCE) inflation figure, which is the Fed’s preferred metric, will provide further insight into when the central bank might begin cutting rates. Additionally, a preliminary estimate of fourth-quarter GDP is expected to reveal a growth rate of 1.7%, the lowest since the 0.6% decline in the second quarter of 2022.
Despite the current period of slower global growth and declining employment in the United States, Wieting believes that this can be overcome, leading to a healthier growth period in the future. He emphasizes that the excess in the economy is not a result of prolonged overheating or a boom but rather excessive government fiscal stimulus related to pandemic recovery. Wieting points out that money supply in the United States has actually declined by 4% over the past year, in contrast to the 1970s when it grew by almost 10% for the entire decade, resulting in sustained inflation.
The Outlook for Investors
Looking ahead, Wieting suggests that investors focus on the next year and beyond. While there may be excesses that still need to be addressed, he remains optimistic about the outlook for the global economy. The decline in manufacturing and trade, as well as the slower employment growth in the United States, are challenges that can be overcome. By taking a longer-term perspective, Wieting believes that these issues can be resolved, leading to a period of healthier growth.
The global economy does not require an economic collapse to rein in inflation and achieve sustainable growth. Major economies, including the United States, have demonstrated resilience to interest rate increases and have managed to avoid a recession. However, as inflation decreases and growth slows, there is increasing talk of rate cuts. Steven Wieting, an expert in the field, remains optimistic, pointing out that the decline in certain sectors is likely to bottom out within the year. It is important to take into account the various economic indicators, such as inflation and GDP, to gauge the appropriate timing for rate cuts. While the current period presents challenges, there is hope for a healthier growth period in the future, particularly if excesses in the economy are addressed. Ultimately, investors should adopt a long-term perspective and remain cautious yet optimistic about the global economy.