A soft landing is becoming more complicated

By Andrea Siviero, Investment Strategist at Ethenea 

The EU is at risk of recession, whereas the US, with a stronger economy and less affected by the conflict in Ukraine, is better equipped to withstand tighter financial conditions. A soft landing of the global economy is still possible but becoming more and more complicated.

The global economy is at a difficult juncture and uncertainty is very high. Against a background of slowing growth, persistent inflation and tighter economic policies, the war in Ukraine and the Covid outbreak in China are serious stagflationary shocks challenging policymakers and threatening economic growth.

The downside risks for the global economy have increased considerably since the first quarter. The baseline scenario for the global economy has been downgraded to reflect slower growth and higher inflationary pressures. The IMF has revised down its baseline scenario for global growth in 2022 from 4.4% in its January forecast to 3.6%. The inflation forecast is now at 5.7% for advanced economies and at 8.7% for emerging economies for 2022.

The war in Ukraine and consequent western sanctions and the Covid-related lockdowns in China represent a combined negative supply and demand shock resulting in higher energy and commodity prices, softening consumer and business confidence, supply chain constraints and international trade disruptions. Without a solution to these exogenous shocks, growth expectations could be revised further downwards in the coming months.

Purchasing Managers Indexes (PMIs) confirm the softening momentum for the second quarter of the year. The May global composite PMI rose marginally to 51.5 (from 51.2 in April) but remains close to the threshold of 50 that separates economic expansion to economic contraction. Supply chain constraints and price pressures remain elevated. Growth prospects are divergent across regions as a result of asynchronous cycles, divergent economic policies and because countries are differently affected by the conflict in Ukraine and the consequent energy shock.

The US economy is resilient

The US economy remains in good health but the latest data point to a softening second quarter. The labour market is very strong with unemployment at 3.8% and wages rapidly increasing. Consumer demand remains healthy and business investment is solid. Inflation is high and sticky with headline inflation at 8.6% and core inflation at 6% in May.

The Fed started an aggressive tightening cycle that will likely bring the Fed funds to the estimated neutral rate of approximately 2.5% by year end, and it just started its quantitative tightening. There is little doubt that the Fed will tighten its policy until inflation is brought under control.

The Eurozone: inflationary pressures are broadening

The Eurozone picture looks gloomier. The Eurozone’s economy grew during the first quarter of the year at a 0.6% pace quarter on quarter. As a result of the conflict in Ukraine, the European Commission revised its forecast for 2022 growth from 4% down to 2.7%. Lately, economic data have shown a mixed picture. PMIs have stabilised in May after a sharp fall in March. The labour market remains solid with the unemployment level at 6.8% and moderate increases in salaries. Below the surface, however, we are seeing the effects of the conflict in Ukraine and high energy prices. Economic confidence is eroding sharply, industrial production is plagued by supply chain disruptions and high energy prices, and orders are declining.

Inflation reached in May an all-time high of 8.1% as a result of higher energy ​ and food prices , but inflation is now broadening to other sectors. Consequently, ​ Core consumer price inflation (CPI) is also picking up at 3.8%.

The ECB has announced that it will conclude its asset purchase programme as of 1 July 2022 and will increase its policy rates in July with 0,25%. It also expects to raise the key ECB interest rates again in September and left the door open to a larger increase of 50 bp in case of worsening of the inflation situation. ​ However with a slowing economy and elevated risks of market ​ fragmentation (spreads between the centre and the periphery) the ECB will need to maintain a flexible approach.

Despite the optimism related to the economic reopening and the beginning of the tourism season, headwinds from the conflict in Ukraine, higher inflation, tighter monetary policy and the economic slowdown in China will continue to hamper economic performance in the Eurozone.

China : sharp contraction of the economy in April

In China the economy has been slowing for some time and has undergone a sharp contraction in April as a result of Covid related lockdown. The People's Bank of China (PBoC) is accelerating the provision of liquidity and reducing rates to support the economy. Fiscal policy ​ continues to be very accommodative. We believe that policy support will progressively start to have an effect and will likely impact economic growth in the second half of 2022 at the earliest.

China is however struggling to combine its health policy aimed at strictly containing the Covid outbreaks with support for its flagging economy. While the authorities have been lately tentatively winding down their strict Covid related lockdowns, this tension may well continue to hamper growth in the coming months and the Chinese economy will struggle to achieve the official 5.5% GDP growth target for this year.

Can a recession be avoided?

Headwinds for the US and European economies are growing. Facing a major stagflationary shock and with greater dependence on Russian energy and little fiscal room, the EU is at risk of recession. With a stronger economy and less affected by the conflict in Ukraine, the US economy is better equipped to prevent a recession. The path for the Fed is however extremely narrow and the risk of policy misstep (excessive tightening) should not be underestimated.

Andrea Siviero
Andrea Siviero

Press contact

Wim Heirbaut

Senior PR Consultant, Befirm

Get updates in your mailbox

By clicking "Subscribe" I confirm I have read and agree to the Privacy Policy.

About Ethenea

ETHENEA offers a wide range of attractive investment opportunities for different investor profiles: risk-minimised, balanced and equity-focused.

Capital preservation and the achievement of stable long-term returns are key components of the investment philosophy of the Ethna Funds. The fund management consistently realises this objective through active management and flexible asset allocation across various sectors and asset classes.

ETHENEA wants to make a contribution and offer responsible and sustainable investment solutions. Therefore, ESG criteria are an important part of the investment processes of all Ethna Funds (Article 8 SFDR).

Further information and legal information can be found at ethenea.com.


PRESS RELEASE – not an official document

We would like to point out that all data and information made available to you has been thoroughly researched by ETHENEA. However, with regard to its correctness and completeness, we cannot assume any liability or warranty for damages incurred either by the recipient of this information or by third parties, either directly or indirectly. In the event that this text is published in any form and to any extent, the publishing entity (editorial office of the newspaper or associated or commissioned third parties, website, podcast, etc.) is obliged to include the necessary disclaimers and legal notices. In addition, in this context, we refer to our legal information: The information contained in the attached document does not constitute a solicitation, offer or recommendation to buy or sell units in the fund or to engage in any other transaction.  It is intended solely to provide the reader with an understanding of the key features of the fund, such as the investment process, and is not deemed, either in whole or in part, to be an investment recommendation. The information provided is not a substitute for the reader's own deliberations or for any other legal, tax or financial information and advice. Neither the investment company nor its employees or Directors can be held liable for losses incurred directly or indirectly through the use of the contents of this document or in any other connection with this document. The currently valid sales documents in German (sales prospectus, key information documents (PRIIPs-KIDs) and, in addition, the semi-annual and annual reports), which provide detailed information about the purchase of units in the fund and the associated opportunities and risks, form the sole legal basis for the purchase of units. The aforementioned sales documents in German (as well as in unofficial translations in other languages) can be found at www.ethenea.com and are available free of charge from the investment company ETHENEA Independent Investors S.A. and the custodian bank, as well as from the respective national paying or information agents and from the representative in Switzerland. The paying or information agents for the funds Ethna-AKTIV, Ethna-DEFENSIV and Ethna-DYNAMISCH are the following: Austria, Belgium, Germany, Liechtenstein, Luxembourg: DZ PRIVATBANK S.A., 4, rue Thomas Edison, L-1445 Strassen, Luxembourg; France: CACEIS Bank France, 1-3 place Valhubert, F-75013 Paris; Italy: State Street Bank International – Succursale Italia, Via Ferrante Aporti, 10, IT-20125 Milano; Société Génerale Securities Services, Via Benigno Crespi, 19/A - MAC 2, IT-20123 Milano; Banca Sella Holding S.p.A., Piazza Gaudenzio Sella 1, IT-13900 Biella; Allfunds Bank S.A.U – Succursale di Milano, Via Bocchetto 6, IT-20123 Milano; Spain: ALLFUNDS BANK, S.A., C/ Estafeta, 6 (la Moraleja), Edificio 3 – Complejo Plaza de la Fuente, ES-28109 Alcobendas (Madrid); Switzerland: Representative: IPConcept (Schweiz) AG, Münsterhof 12, Postfach, CH-8022 Zürich; Paying Agent: DZ PRIVATBANK (Schweiz) AG, Münsterhof 12, CH-8022 Zürich. The paying or information agents for HESPER FUND, SICAV - Global Solutions are the following: Austria, Belgium, France, Germany, Luxembourg: DZ PRIVATBANK S.A., 4, rue Thomas Edison, L-1445 Strassen, Luxembourg; Italy: Allfunds Bank S.A.U – Succursale di Milano, Via Bocchetto 6, IT-20123 Milano; Switzerland: Representative: IPConcept (Schweiz) AG, Münsterhof 12, Postfach, CH-8022 Zürich; Paying Agent: DZ PRIVATBANK (Schweiz) AG, Münsterhof 12, CH-8022 Zürich. The investment company may terminate existing distribution agreements with third parties or withdraw distribution licences for strategic or statutory reasons, subject to compliance with any deadlines.