An Amundi Institute cross asset investment strategy research paper.
High inflation has not triggered a wage-price spiral in the advanced economies.
Monetary tightening has contained inflation expectations and a continued firm stance will bring down inflation, possibly faster than expected, according to Amundi, a European investment manager.
Mahmood Pradhan, Head of Global Macro Economics, at Amundi Institute, said: “With respect to asset prices, the most favourable scenario would be a ‘good’ soft landing, with headline and core inflation falling proportionately. By contrast, sticky core inflation and less patient central banks could increase the risks of a harder landing, which would depress equity markets and lead to a bear flattening in rates markets.
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“However, a faster fall in inflation could be a mixed blessing. If inflation falls because of a sharper than expected decline in growth, the risks of a deeper recession and protracted weakness will be significant, especially as there would be little room for a policy response this time. Beyond fixed income, most asset classes would be under sustained pressure.”
Mahmood Pradhan added:
Our central case sees the Fed and the ECB continuing to tighten until the second half of 2023 and maintaining a restrictive policy stance.
- US: our central scenario of headline inflation at 4.3% is marginally more positive than official forecasts because we expect more subdued growth for 2023 and 2024, with a relatively high 40% probability of a recession in the second half of 2023
- Europe: we expect core inflation to remain elevated and decline very gradually, to a little under 4% at the end of 2023
- Emerging Markets: China’s reopening should reduce EM inflation as supply chains continue to normalise, notwithstanding some offset from higher commodity prices.
To summarise, the factors that could exert downward pressures on inflation relative to our central scenario:
– Lower risk this time of a wage-price spiral in advanced economies
– Financial conditions will get tighter
– China reopening will relieve supply chains and reduce inflation pressures globally. On balance, this effect will outweigh higher domestic demand in China
– Protracted subdued growth in both the United States and Europe, with very little policy space to respond.
The full Amundi Institute report can be read here.
