Economic and stock market outlook: what to expect in the coming months?

Philippe Ledent

Philippe Ledent

Expert economist ING

With soaring inflation, geopolitical tensions, energy supply fears and rate hikes, the global economic outlook has deteriorated in recent months. What is the economic outlook? And what does it mean for investors?

The end of the energy crisis is not yet in sight

Thanks to some favourable factors, such as the mild weather and reduced LNG imports to China, the pressure on the gas market has eased somewhat. Gas prices are currently well below their peak levels of a few months ago. However, it is far too early to conclude that the worst is over. Once temperatures drop, the situation could deteriorate rapidly. The gas market will continue to be very tense over the coming years. The International Energy Agency (IEA) recently warned of a gas shortage in Europe next winter.

Pending a change of course

This is a period of expectation for financial markets as to when and if central banks will change course.

"Change course" is probably not the right term to use, as it would imply a real turning point in central bank policies, whereas what the markets are really looking for are signs of a slowdown or even an end to rate hikes.

Globally, major central banks are still facing high and, in some cases, rising inflation, while signs of an economic slowdown and recession are increasing.

What complicates the decisions for central bankers is the fact that they have rushed so quickly to normalise their policy that they cannot yet see the full impact of their decisions. It usually takes at least six to nine months for changes in monetary policy to work their way through to the real economy. This lag increases the risk of overdoing tightening.

At the same time, the rigidity of inflation over the last two years has also increased the risk of an end to interest rate increases.

As economic slowdowns and impending recessions become more visible in December, we expect the major central banks to slow down their tightening efforts and eventually end them in the first quarter of next year.

For the real change in direction expected by markets, i.e. rate cuts, headline and core inflation will first have to fall significantly, which is not expected to happen before next summer.

Our guidelines

  • Euro area: The winter recession could be less severe due to the unusually mild weather in October and gas inventories at a maximum, combined with government support measures in many countries. We forecast GDP growth of -0.7% in 2023, after 3.1% in 2022. At the same time, we expect energy prices to remain high, making the winter of 2023/24 a new economic and political challenge. The European Central Bank is expected to raise rates by a further 75 basis points by next February.
  • United States: With November marking the fourth consecutive 75 basis point increase in Federal Reserve rates, there are increasing expectations that the pace of hikes will slow from December onwards, due to growing concerns about the recession. The risks of recession are increasing, but that is the price the Fed is willing to pay to keep inflation under control.
  • United Kingdom:  The change in political leadership, accompanied by a dramatic reversal in fiscal policy, has helped ease market concerns about UK debt. However, a recession remains inevitable.
  • Energy: Natural gas prices came under strong downward pressure in October due to milder weather and high inventory levels. European gas markets will remain tense and we expect prices to rise, which will unfortunately destroy some of the demand.
  • Foreign exchange market: The dollar has weakened recently, particularly as a result of lower gas prices. We believe that the strength of the dollar may persist until the end of the year, given that the restrictive nature of the Fed's monetary policy is combined with weak growth in the euro area and China.
  • Rates: Even though the pace of interest rate increases is tending to slow down, market rates are still under upward pressure.

And now?