Global Market Outlooks—Too Hot, Too Cold or Just Right?

by Stephen Dover of Franklin Templeton Investments, 10/8/23

The US economy has been more resilient than many pundits had anticipated over the past year—but can this resilience continue? Stephen Dover, Head of Franklin Templeton Institute, recently hosted a discussion with economists from across our firm to explore where the risks and opportunities for investors lie today and into year-end.

The metaphor of temperature (too hot, too cold or just right) aptly encapsulates the questions in current market dynamics. Are we overheating, signaling inflationary concerns and a potential bubble? Is the economy too cold, characterized by lagging growth and the risk of stagnation? Or perhaps we’re in that elusive “Goldilocks” zone, where things are just right, at least for now. We recently hosted a discussion with economists from across our firm to provide their varying views and insights related to these questions.

Our panel discussion included John Bellows, Portfolio Manager, Western Asset Management; Sonal Desai, Chief Investment Officer, Franklin Templeton Fixed Income; Michael Hasenstab, Chief Investment Officer, Templeton Global Macro; and Paul Mielczarski, Head of Global Macro Strategy, Brandywine Global.

Here are my key takeaways from the discussion:

  • The US economy has been more resilient than anticipated, due primarily to the following factors:
    • Lower inflation has boosted real income and spending power.
    • Excess savings built up during the pandemic has also aided spending.
    • There has been a reversal of pandemic-related disruptions, such as a rebound in auto production and sales as chip shortages ease.
    • The labor market has been strong and may gather strength more broadly if the striking auto workers get the wage increases they are asking for.
  • There are significant risks as to whether US economic resilience will continue into the fourth quarter and beyond. Many of the reasons for the US economy’s resilience are starting to fade. Looking at the fourth quarter of 2023, US student loan repayments will resume, which will likely be a drag on spending. The continuing threat of a government shutdown later in the year could be a negative for growth. Typically, there is a one- to two-year lag between higher interest rates and their impact on employment growth. The Federal Reserve started hiking around 18 months ago, indicating that a slowdown is more likely going forward.
  • Europe and China have shown slower economic growth than anticipated. Europe has shown great difficulty recovering from the trade shock of last year following Russia’s invasion of Ukraine. The downside in Europe may reflect the impact of policy tightening from the European Central Bank. China has experienced many challenges, including a decline in housing-related activities, putting pressure on corporate and local government balance sheets. The period of weak Chinese growth adds a disinflationary impulse to the global economy.