In this summer of 2023, the pressure remains high for central banks, governments of all countries, and temperatures. It’s up to businesses to adapt to this climate!
1- Will desinflation reassure central banks ?
After surging to nearly 10% on an annual basis last autumn, inflation is receding in Europe and the United States. The Eurozone price index, for instance, dropped to +5.5% in June, the US PCE index to +3.8%, and even +1.3% excluding real estate. Deflation looms in China.
The key now is to confirm and amplify this trend in July and August to halt the central banks’ headlong rush toward monetary tightening. They are not yet convinced that inflation is definitively on the decline. The issue lies with the “core” indices, which are showing a much slower erosion and leaving them concerned about a price hike dynamic surpassing 2%.
The July monetary policy meetings are not expected to bring any surprises, as a 25bps increase in benchmark rates on both sides of the Atlantic is anticipated. However, the tone of the statements and press conferences will be closely monitored.
2- Will the corporate earnings season live up to expectations? 
The release of corporate earnings spans from mid-July to August. The investors’ expectations do not seem unreasonable as analysts predict a decline in profits for the second quarter of 2023 compared to 2022: -7.2% in the United States and -8.2% in Europe.
However, if the markets have been progressing since the beginning of the year, it is largely due to implicit hopes of improved corporate results. Investors have realized since autumn that companies have taken advantage of inflation to increase their selling prices.
But now reality is knocking on the door: on one hand, the slowdown in consumption could lead to a deceleration in sales volume, and on the other hand, wage pressures will be visible even if partially offset by the decline in energy prices and logistics costs. Ultimately, will profit margins manage to maintain their historically high levels?
The general sentiment remains optimistic as companies have not whispered to the market about very bright earnings forecasts. In the United States, favorable earnings surprises are expected to be at 70% as usual.
Everything will ultimately depend on the nuances in companies’ discourse regarding the outlook for the second half of the year. The narrative is expected to be a classic one, stating that there is little visibility and no expected accidents.
3- The elusive or hidden recession?
Since February 24, 2022, and the war in Ukraine, markets have been fearing a recession, a fear accentuated by monetary tightening and insufficient Chinese stimulus. However, this much anticipated and dreaded recession seems to vanish as soon as it appears to be on the verge of settling in. The beginning of 2023 has followed the same pattern: while Europe announced a 0.1% decline in activity in the first quarter, a detailed analysis revealed that only Ireland had pushed the figure into negative territory, affected by the financial strategies of American technology giants.
Moreover, the famous “confidence indices” seem to have stabilized or, for some, rebounded in the United States, although they remain highly disappointing in Europe. Additionally, during his visit to Europe, China’s Premier Li Qiang announced at the end of June his intention to support domestic demand to achieve the country’s growth targets. Could this bring hopes of a “soft landing” for the global economy?
4- The real estate market : Sword of Damocles or paper tiger ? 
Real estate is causing concerns everywhere. It has been at the center of the confidence crisis in China, where the commercial aspect of the market triggered turbulence that briefly destabilized regional American banks. In Europe, the rapid tightening of the financial environment is putting the entire sector under pressure.
The concerns related to real estate have two dimensions. Firstly, there is a macroeconomic aspect due to the significant role of this sector in the economy of almost every country. In China, it accounts for nearly 20% of the annual GDP in a broad sense, while in the United States, approximately 9% of employment is directly or indirectly linked
to it. Secondly, there is a financial aspect as banking balance sheets are filled with real estate debt securities, and panic over these securities was the origin of the 2008 financial crisis.
The turbulence could persist for several quarters, but it’s not all gloomy. Outside of China, it is the commercial office real estate sector that is facing the most severe short-term difficulties, not the entire sector. In China, the latest figures show a slight recovery in sales of existing homes. Overall, the prevalence of fixed-rate loans helps to mitigate the effects of monetary tightening, although caution remains necessary.
5- Financial stability tested by summer volatility?
In March 2023, two events reminded market participants that the rapid change in the monetary environment had consequences for the stability of the financial system. Within a span of less than ten days, Silicon Valley Bank (soon followed by Signature Bank and First Republic Bank) in the United States and Credit Suisse in Europe faced significant challenges. The fire was quickly extinguished through massive and coordinated interventions by central banks and regulators, as well as support from major players in the banking sector – JP Morgan on one side and UBS on the other – but concerns have not completely disappeared. In addition to the ultra-rapid increase in interest rates, monetary tightening has also been accompanied by a significant reduction in the balance sheets of central banks on both sides of the Atlantic, which has put additional pressure on banks’ balance sheets. Furthermore, outside of banks, many financial entities are experiencing increasingly tight refinancing conditions. In this context, along with the low liquidity in the bond markets during the summer, precise management of monetary adjustments becomes even more necessary.
6- A turning point for Central Banks at Jakson hole at the end of August ? 
As every year, the Jackson Hole Symposium in Wyoming, scheduled from August 24th to 26th, will provide an opportunity for major global policymakers to conduct a strategic review. The theme is already known: “Structural changes in the global economy.”
However, observers are particularly interested in two main aspects concerning central bankers. Firstly, which indicators should be considered to accurately anticipate inflation trends? And secondly, what monetary policy path should be chosen to simultaneously ensure a return to price dynamics in line with their mandate and maintain balance in a financial system burdened by the mountainous debt accumulated since the 2008 crisis and, especially, since the emergency plans implemented in response to the pandemic?
On the first point, there are numerous questions regarding central banks’ persistence in relying on lagging indicators, such as core inflation, to determine future trends.
The second point is equally sensitive. In early July, Olivier Blanchard, the former Chief Economist of the IMF, proposed raising the inflation target to 3% in major Western economies instead of 2%. According to him, this change in target would provide additional flexibility to monetary policies while preserving their credibility.
7- A scorching summer between Ukraine and Russia?
War has returned to Europe. By attacking Ukraine, Russia expected to engage in a swift operation, lasting no more than a few weeks. However, nearly seventeen months and a peculiar internal Russian rebellion later, the strategic situation has reached a tipping point.
With the Ukrainian slow counter-offensive, defense of the Russian “buffer zone,” and concerns surrounding the Zaporizhia nuclear power plant, the situation could rapidly evolve this summer, including the possibility of a diplomatic breakthrough as initiatives seem to multiply in recent weeks to find a way out beyond the use of arms.
Such progress would undoubtedly bring relief to the markets. However, concerns of energy shortages in Europe may resurface as winter approaches, especially if a new stimulus in China increases Asia’s appetite for liquefied natural gas. The prolonged conflict would exert additional pressure on the economy.
Moreover, NATO’s solidarity in supporting Ukraine could lead to a hardening of Russia’s stance, which would worry the markets.
8- China : Balancing economic stimulus and geopolitical ambition 
This summer, China faces a dual issue, both economic and strategic. The economic aspect has caught investors off guard. The post-COVID recovery has faltered, and economic activity is disappointing. The real estate sector continues to face significant challenges, and most notably, consumer demand remains subdued. Some are even beginning to refer to the ‘Japanification’ of China.
As a result, pressure is mounting on the country’s authorities to implement a robust stimulus that can reignite consumption, particularly as urban youth unemployment, exceeding 20%, threatens social cohesion. A massive plan similar to the one implemented in 2008-2009 is being ruled out, but swift action is required.
The other summer issue for the Middle Kingdom is of a geopolitical nature. From August 22nd to 24th, the BRICS summit will take place, bringing together countries from the Global South around China, with the aim of establishing an alternative to the Western bloc. This provides an opportunity to further enhance cooperation, likely focusing on the role of the Yuan, especially as India has already decided in early July to use this currency to settle its energy purchases from Russia.
Tensions with the United States appear to be shifting in recent weeks from military and the Taiwan Strait to the economic realm, with exchanges of sanctions and counter-sanctions in the technology sector.
9- The revival pf Europe : The German dilemna amidst the Spanish election
Le On July 1st, Spain assumed the presidency of the European Union. Despite the upcoming early legislative elections scheduled for July 23rd, the country must do everything to politically revive Europe amidst numerous disagreements, including energy, budgetary and monetary balances, and migration policies. The announcement on June 26th of cooperation between Italy, Germany, and France for the supply of critical raw materials is good news but only a first step.
The core of the European issue, apart from divergences on the necessity of maintaining a highly restrictive monetary policy amidst heavy debt and declining economic activity, lies in the major challenges faced by Germany. It is currently going through a very complicated period, nearing “recessflation”: a continuous economic downturn combined with an inability to control inflation fueled by significant wage increases as a countermeasure to a long period of austerity.
Politically, Germany is also torn between the anti-nuclear stance of the Greens, the FDP Finance Minister committed to budgetary orthodoxy, and the SPD, historically supportive of Ostpolitik.
Thus, Spain has the task of injecting a new momentum that is compatible with the “red lines” of each country: the German industry, French nuclear policy, and Italian migration policy. The first step will be the Europe-Latin America Summit in Brussels on July 17th and 18th, followed by the EU-Mercosur treaty.
10 – The risong temperatures make climate solutions urgent
Summer in the Northern Hemisphere has long been synonymous – at least since the mid-20th century – with vacations, rest, a time to pause and enjoy the sunny days, and disconnect from the frenzy of the world.
The climate crisis has changed everything. In recent years, the succession of temperature records, droughts, wildfires, and other extreme weather events have reminded all economic actors of the urgency of decarbonization solutions and the need to carefully manage the networks and energy supply of consumer countries. The summer of 2023 aligns with this logic, as heatwaves hit Europe and the United States, the rapid decline in the water level of the Rhine, massive wildfires in Canada, and record-breaking temperatures in China and Asia already have tangible economic repercussions.
To meet the goals of the Paris Agreement, massive amounts – nearly 3 trillion annually! – should be invested in climate and decarbonization solutions. We are still far from that target, but the momentum is underway and will accelerate. Companies already play a significant role in this transition.
Wishing you a wonderful summer !
Guillaume Dard & Wilfrid Galand
