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    RESEARCH  |  3 POINT PERSPECTIVE  |  MACRO SHIFTS

    Q4 2023 Global Outlook: A manageable slowdown

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    Contributors: Ajay Rajadhyaksha & Amrut Nashikkar
    07 Sep 2023

    Growth is slowing in developed markets, and China continues to disappoint. But price pressures in developed markets are unlikely to allow rate cuts for some time. The coming quarter should be one of consolidation in markets, according to our Research analysts.

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    1. Western central banks will keep rates higher for longer

    Growth is slowing and inflation is coming down -- but not close to the point where banks can cut interest rates aggressively.

    Take the US, for example, which has been surprisingly resilient despite a very rapid rate-hiking cycle. Part of the credit goes to the housing market, which has benefited from a reluctance among existing homeowners to give up their low mortgage rates by selling their homes, as well as from a long period of underbuilding. Government tax credits have also turbo-charged a manufacturing construction boom. Meanwhile, the services economy is in a virtuous feedback loop: job creation begets aggregate income gains, which leads to spending on services, which in turn leads to more job creation.

    Our Research analysts expect a loss of momentum in the US, but it is likely to be a mild slowdown, rather than a deep recession. That means the Federal Reserve is likely not cutting rates – not quickly and by not much. The same is true for the euro area, where our analysts expect the European Central Bank to hold for the next year or so.

    2. In China, fears of a systemic financial crisis are overstated

    The collapse in Chinese growth over the past six months has been striking, and there are few signs of it bouncing back. The labour market is weak and household confidence low, dragged down in part by the struggles of the property sector. Policy makers have not managed to convince the population to consume more, and the country’s export engine is sputtering.

    Some have suggested that this could be China's ‘Minsky moment’, when capital flees domestic markets, or perhaps the Chinese equivalent of the US housing meltdown of 2007-08. Our analysts doubt it. The domestic property market is characterised by high down-payments and low loan-to-value ratios. And Beijing has learned from previous periods of capital flight, and now appears to have some more effective controls in place.

    Activity will surely be hit, however. China’s growth is now forecast to be a disappointing 4.5% this year and an even weaker 4% in 2024.

    3. Neither stocks nor bonds appear very appealing in this context

    Bonds do look better priced after the recent sell-off but are not yet convincingly cheap. Our analysts see risks from the Bank of Japan's exit from its ultra-easy monetary policy, which has pushed up yields in other markets, as well as from the scale of US Treasury issuance. They offer caution that the US government is running a very high deficit with virtually everyone employed. If the jobless rate rises to a more historically normal 4.5-5%, the US fiscal profile could worsen.

    In equities, our analysts note that multiples have widened considerably this year, as profits have weakened.

    For a second quarter in a row, our Research analysts recommend investors stay overweight cash, rather than equities or fixed income. Cash did better than both during the third quarter, and a repeat performance is expected in the fourth.

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    About the experts

    Ajay Rajadhyaksha

    Global Chairman of Research

    Ajay Rajadhyaksha is Global Chairman of Research at Barclays, based in New York. He drives the global macro research and strategy effort, including economics, rates, FX, commodities, emerging markets, and asset allocation. Since joining Barclays in 2005, Ajay has held various positions, including Head of Macro Research, Co-Head of FICC Research and, before that, Head of US Fixed Income Research and US and European Securitised Research.

    Amrut Nashikkar

    Managing Director, Fixed Income Strategy

    Amrut Nashikkar is a Managing Director in the Fixed Income Strategy team at Barclays based in New York, covering interest rate derivatives with a focus on interest rate volatility and the Libor transition. Amrut joined Barclays in 2008 from Lehman Brothers, where he was an interest rate strategist. Prior to that, he taught at New York University, where he graduated with a PhD in finance. He also holds a management degree from the Indian Institute of Management, Ahmedabad, and an undergraduate degree in engineering from the Indian Institute of Technology, Kharagpur.

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