Lower growth outlook

Increasingly hawkish central banks and consumption hit by higher energy and food prices have led to the fear of recession rising significantly. At the same time, economic growth is higher than the trend growth and the labour market is strong.

For the month as a whole, the US S&P 500 Index rose by 0.2 per cent measured in USD, while the European Stoxx 600 Index dropped by 0.6 per cent measured in EUR and the Nordic VINX Index declined by 0.2 per cent measured in NOK. Here in Norway, the Oslo Stock Exchange Benchmark Index (OSEBX) rose by all of 3.8 per cent.

Fear of recession
Pressure on supply chains and higher commodity prices have contributed to record-high inflation. This trend has been further reinforced by the war in Europe, which has cut off access to a number of raw materials from Russia. The reduction in buying power has therefore played a role in consumer confidence falling sharply, despite a strong labour market with almost record-low unemployment levels. Combined with increasingly hawkish central banks, the market’s fear of recession has risen steadily. As long as we avoid a sharp rise in unemployment, however, it is more likely that there will be a growth pause rather than a recession.

From a K to a diamond
At the beginning of the pandemic, we saw a clear division between the winners and losers in the economy. This was referred to as a «K», in that manufacturers of goods and technology companies benefited greatly from a shift in consumption towards, for example, sports equipment and software. The opposite was true for travel companies and restaurants, for instance, which were hard hit by lockdowns. As the economy has opened up, this trend has been reversed. For the service sector, the problem is now a lack of staff, as many employees were dismissed or have retrained or moved away during the pandemic. The falls in the manufacturing barometers may thus be a reversal with an inverted K, a change that is more likely to become a diamond rather than the start of a recession.

Russian oil sanctions
In many ways, the oil price reflects this forking of the economy. When the economy shut down the first time, oil price contracts plunged due to the disappearance of the demand from transport and the travel industry. With the reopening, demand has returned and contributed to the oil price rising sharply again. The oil price had risen a lot even before the invasion of Ukraine, and was one of the reasons for the inflationary pressure we are now seeing. The EU’s Russian oil sanctions mean that the supply side is also sharply reduced.

The road ahead …
Measured by the MSCI World Index, global shares were more or less unchanged measured in local currency, with a small decline of 0.2 per cent. Although consumer confidence has fallen sharply, a strong labour market should counteract any immediate risk of a recession. Company earnings are still strong and this, combined with the fact that global shares have fallen this year, has contributed to the markets now offering more attractive pricing.