Overall world growth in 2023 seems likely to be a little lower than the rate seen in the years immediately pre-Covid. But the composition of that growth is changing. The US economy has proved surprisingly strong, with growth running at an annualised rate of around 5% in the third quarter, according to one estimate. In contrast, the German economy remains in (admittedly, a mild) recession. China’s growth has been disappointing, especially for those expecting a big surge following the end of the zero-Covid policy. But elsewhere in emerging economies, Brazil’s strength has surprised and India is set to be the fastest growing major economy, not just this year, but for the next five years.
These shifting sands of global growth are nothing new. Country, regional and industry-specific patterns of growth vary over time. From the end of World War 2 to the mid-1960s, Italy enjoyed a prolonged economic boom; now it has a stagnant economy and demographic trends which will perpetuate that trend. In the 1970s, Gulf economies boomed as the west suffered from two oil price shocks. In the 1980s, no one seriously thought of the US as a major global car producer and exporter. Now, it is a leader in electric vehicles (EVs). European car makers are finding life difficult, especially as they face the threat of cheap Chinese imports. In the Covid pandemic, there was a worldwide shift from consumer spending on services (travel and entertainment, in particular) to goods (such as working-from-home technology), a trend which has now reversed.
When the Fed started to raise interest rates, many were concerned about the implications for economic growth - it could trigger recession – and the equity market – which could suffer due to weaker corporate earnings and already high valuations. Neither has happened. Over the last 12 months there have been no days when the S&P 500 index has fallen by more than two standard deviations – such losses were much more common in the past. But low equity market volatility has been a temporary phenomenon in the past.
With interest rates having been raised to pre-2008 levels and, perhaps more importantly, the Fed reducing its balance sheet, a rise in US equity market volatility is feasible.
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