I thought it might be interesting this week to try and evaluate where we are on the economic cycle. Without doubt, there are conflicting signals that have made it extremely difficult to forecast, with any certainty, the direction of travel for economies and indeed the markets over specific time periods.
In this update, we also consider the latest data in harmony with the indicators for what’s coming down the tracks, as well as what is unfolding across investment markets. Apologies for this extended version but there is a lot going on!
Today’s Agenda
- The traditional economic cycle
- This confusing economic cycle
- Equilibrium is slowly being restored
- Are high interest rates working?
- House prices in decline
- Mortgage war as a 4.99% mortgage becomes available
- A battle for UK businesses
- Food inflation is falling
- The French love us
- Talking about Europe… rates rise again
- Rising oil prices and their impact on inflation
- Asian markets looking more optimistic
- Summary
The traditional economic cycle
Whilst we have seen many indicators of where we are on the economic cycle, there is a diverse range of opinions as to what is happening out there. There are confusing signals depending on how you read the data.
Typically, as we move through cycles, we see a familiar pattern. I’ve paraphrased an extract from ft.com which I believe sums this up well.
In a recession, consumers are watching their wallets and companies are keeping inventories and investment low. Asset valuations are depressed. Most people feel poorer and expect to feel even poorer tomorrow. This is not far from what we are experiencing now but there are some idiosyncrasies.
Then, for whatever reason, things feel a little less bleak. Families open their wallets a tiny bit. Companies realise inventories need restocking, plants need updating and businesses need more staff. Investors realise assets are too cheap and buy. Before long, production, investment and valuations are rising. This is called a recovery.
Then, down the line, we start to see excesses creep in. Inventories are high. Capacity meets, then outruns, demand. Asset prices appear lofty. However, there is still a feel-good factor, but the hour is growing late. This could be labelled as the peak of optimism and is a time when many new investors pile in.
Some small shock, perhaps provided by a central bank, is enough to make companies realise they need to cut prices and slow investment. Consumers become hesitant. The economy weakens and we head towards a recession again.
Continues….
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