Meanwhile, growth has already slowed under pressure from various shocks such as high energy prices. As projections from the September Federal Open Market Committee meeting make clear, interest rates will remain elevated throughout next year and policymakers are fully committed to reducing inflation even if it takes a toll on growth.
As a result, the global economy is expected to experience an extended period of sluggish growth that lasts through 2023. There is a substantial risk that the global economy slides into recession
While the US and some other major economies might be able to avoid full-blown economic recessions
, they will inevitably experience sharp downturns. Given that more listed companies are on the goods side of the economy, a recession in the goods sector is not a great backdrop for stocks.
During the pandemic, as opportunities to purchase services were cut off and households in many countries received large-scale income support, the goods sector benefited from a dramatic shift
in spending patterns and soaring demand for consumer goods. It received additional support from an unusually quick rebound in business investment spending.
However, both goods demand
and production have moderated recently. This could soon lead to further softening and a strong likelihood of outright contraction in the global goods economy.
Consumer spending on goods has stagnated through most of 2022. The transition back towards services spending appears to be in its early days. For example, the goods share of US household consumption is still elevated, and there is ample room for further correction.
Expect a cooling in business investment spending, too. Surveys of intentions for capital expenditures have faded recently, pointing to more cautious business sentiment
. At the same time, the global manufacturing purchasing managers index has slipped, signalling that industrial output could start contracting before year-end.
Emerging Asia faces the greatest risks associated with the goods slowdown. External demand
, which is a key driver of the region’s post-pandemic recovery, is showing signs of broad-based weakness.
The slowdown in global goods demand and the shift in developed market consumer spending towards services are weighing on emerging Asia’s exports. Export growth in some North Asia bellwethers has deteriorated sharply in recent months. Exports from both South Korea and Taiwan surprised on the downside in September, with Taiwan recording the first year-on-year decline since June 2020
The pandemic-fuelled boost to goods demand, especially tech demand, seems to be fading. Tech demand is especially important for emerging Asia given that electronics account for around a third of Asia’s exports. In addition, semiconductors represent large portions of tech exports
in both South Korea and Taiwan, suggesting an outsize impact of the semiconductor cycle downturn on their overall exports.
Moreover, the softening global capital expenditure cycle is weighing on emerging Asia’s capital goods exports such as machinery. The global goods slowdown is especially challenging for small, open economies such as South Korea and Taiwan, which are more exposed to external demand.
Even with a weaker growth outlook, a swift loosening of monetary policy appears unlikely. As inflation is sticky in most regions, major central banks have more work to do.
Fed officials said last week that they needed to see evidence that underlying inflation had solidly peaked before considering a pause in raising interest rates. While goods price inflation has begun slowing at the margins, core inflation
is expected to remain above central bank targets next year as services inflation persists at high levels.
The risks are tilted towards inflation remaining high. Labour markets might prove resilient to a spell of soft but not negative economic growth, keeping wage inflation elevated. At the same time, inflation expectations might have drifted high enough to hold inflation steadily above central bank targets.
Sylvia Sheng is a global multi-asset strategist at JP Morgan Asset Management