European market decline reflects investor caution as 2023 approaches

On Wednesday, the pan-European Stoxx 600 index closed slightly below the flat line amid a general market decline. As 2022 draws to a close, the Stoxx 600 is down more than 12% year-to-date (YTD).

In addition, caution abounds in European financial markets as investors remain wary of continued high inflation and tightening central bank fiscal policy. Finally, investors are also weighing the impact of a global recession on the likely headwinds in 2023.

The European Stoxx 600 Index began Thursday’s session down 0.5% in early trade. In addition, food and beverage stocks plunged 1% to lead losses as virtually every sector traded in the red.

European market decline follows Asia-Pacific decline

The fall in the European market looks set to extend the weak sentiment in Asia-Pacific markets. Conversely, there was a slight gain in U.S. equity futures to start Thursday’s rally. Overall, global markets are hours away from the end of a turbulent year characterized by disparate macro factors. These include the selloff in technology stocks, soaring inflation due to the fallout from Russia’s war in Ukraine, and China’s continued Covid restrictions. China’s recent easing of its latest zero-covid measures has done little to improve investor confidence. According to a recent assertion by an economist, the global economy is headed for a decade of slow growth. However, author and chief economist of Tressis Gestion, Daniel Lacalle, also said that the full reopening of the Chinese economy remains the silver lining. At a press briefing, Daniel Lacalle explained:

“The reopening of the Chinese economy is certainly going to give a significant boost to growth around the world, but also – and I think this is a very important factor – German exporters, French exporters have felt the pinch of the lock-in and the weakening of the earnings environment in China, and that is certainly going to help a lot.”

Daniel Lacalle further noted that the expected Chinese boost would be different from pre-pandemic growth levels for a while. As he put it:

“I think we’re probably going to enter a decade of very, very low growth in which the developed economies are going to get lucky with 1 percent growth per year, if they can do it…”

IMF projections for global GDP and inflation

According to International Monetary Fund projections, there will be a gradual slowdown in world GDP growth between 2021 and 2023. The IMF puts this at 6 percent in 2021, 3.2 percent in the current year, and 2.7 percent in 2023, which is lower. The Fund also described this as the weakest growth trajectory since 2001, excluding the financial collapse and the start of the Covid phase.

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The projections also indicate that global inflation could rise from 4.7 percent last year to 8.8 percent in 2022, before falling back to 6.5 percent in 2023. In addition, global inflation is expected to fall further to 4.1 percent in 2024. These figures remain above the target levels of several major central banks.

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