Is the current macroeconomic environment more akin to that of 1981, or 2001? October saw weakening business trends in China, European consumers increasingly wary of recession, fairly robust U.S. consumption patterns, and shifting foreign exchange rates. Jeremy Richardson shares his hopes for a fairly short, sharp and shallow economic downturn.
Watch time: 4 minutes 40 seconds
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Hello, this is Jeremy Richardson from the RBC Global Equity Team here with another update. And I think one of the conundrums investors are facing is a question of whether or not we're facing conditions which resemble more like 2001, or is this actually going all the way back to 1981? And the reason for asking and posing that question in that way, is that both of those two years had economic downturns, but the causes of them and the consequences of them have felt very, very different.
In 1981, we had rising interest rates in order to suppress inflation. And you might think that it's a good fit to what we're seeing at the moment as inflationary forces continue to be with us to a greater or lesser extent. Whereas in 2001, obviously post the Internet bubble, there was quite a bit of value destruction, and yet the economic downturn that resulted from that was actually fairly short, sharp and shallow.
Now which of those two things you sort of think is the best analogy may inform your view of how you are interpreting the current earnings season. And that earnings season, I would say so far, the news from it remains somewhat mixed. We are seeing confirmation of weakening business trends in China from some of the companies we've been reporting. It has been widely covered that the Chinese GDP came in recently at 3.9%, which is significantly below the government's own target of 5.5% percent. And some of those, that weaker GDP trend, does seem to be playing through into some of the more recent business trends we're also seeing from companies.
For European companies, the anecdotal evidence would suggest that actually consumers in Europe have moved into something of a defensive crouch, very much sort of changing their behaviours as if the recession is very much here. And you remember that we spoke about this on a previous update; how concerns around rising food, energy and shelter costs meant that you had concerns about consumption patterns, particularly for those households toward the bottom end of the income distribution. So far, those concerns seem to be justified, although better businesses are so far able to sort of manage their way through that.
In the U.S., however, I would say it's not quite so gloomy and the news from many of the U.S. financial companies is actually reasonably robust. No signs yet of any particular credit issues, despite the fact interest rates have been rising. And the U.S. consumer, partly helped by a very tight labour market still, it seems to be fairly robust and consumption patterns seem to be holding in there, at least for now. So, I would say somewhat of a mixed picture.
On top of all this, we are seeing some consequences, some quite big changes in foreign exchange rates. Japanese yen has been particularly weak, we've had parity achieved between the U.S. dollar and the euro, and the strength of the U.S. dollar is having the effect, for US companies at least, when they translate overseas profits back into their domestic currency, that the value of those overseas profits is being diminished and that's having an impact upon reported earnings this current earnings season. So, coming back to that sort of 2001 versus 1981, well, you know, a lot of it comes down to the outlook for inflation and central banks. And there are just a few indications, I don't want to overstate this, but a few noises off as people might say, from central bankers commenting that maybe the pace of interest rate increases may need to be adjusted now that they seem to be more concerned about the lag effects of historic or past interest increases. And therefore, one infers, somewhat aware that they could go too far too soon.
So, if that means, then we end up avoiding the 1981 situation and end up with something like 2001, I think that actually will be very well received by investors. Now, of course, in 2001, those with iPods were probably listening to things like Survivor with Destiny's Child, those of us with Walkman’s in 1981 probably listened to Soft Cell and Tainted Love. Musically speaking, I’d probably go with Soft Cell, Tainted Love, but economically speaking, I'd much rather have 2001 and fingers crossed, that's what we get. I hope that's been of interest and I look forward to catching up with you again soon.