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The economy continues to show resilience

GDP growth rates for the fourth quarter of 2022 confirm the resilient nature of economic activity, which continues to slow but does not contract, write Guy Wagner and his team in their latest monthly market report "Highlights".

GDP in the United States grew at an annualised rate of 3.2% from the previous quarter, supported by continued growth in household consumption. “Nevertheless, higher inventories and lower imports boosted the growth rate in the fourth quarter and indicate that the economy remains on a slowing trend,” says Guy Wagner, Chief Investment Officer (CIO) of the asset management company BLI - Banque de Luxembourg Investments. In the Eurozone, GDP increased by 0.1% from the third quarter, defying multiple forecasts of a contraction. In Germany and Italy, activity declined slightly, whereas it grew in both France and Spain.

China: considerable rebound in activity from the second quarter at the latest

In China, GDP grew by only 2.9% year-on-year, ending 2022 on a weak note, as expected. “Nevertheless, the end of the zero-covid policy and the reopening of the economy should trigger a considerable rebound in activity from the second quarter at the latest.” In Japan, rising inflation impacting household purchasing power and slowing external demand could negatively affect the fourth quarter growth rate.

Major central banks increase their key interest rates

In line with expectations, the U.S. Federal Reserve raised the target range for the federal funds rate to 4.50 - 4.75 per cent in early February. Chairman Jerome Powell hinted that an additional 0.25% tightening was likely at the next meeting in March. He rejected the possibility of easing in the second half of the year. In Europe, the central bank raised its main policy rate to 3%. President Christine Lagarde hinted at another 0.5% interest rate hike in March. The monetary policymaker offered no clear guidance on the policy path beyond this period.

Decline in long-term interest rates in the US and in Europe

Slowing inflation on both sides of the Atlantic led to a decline in long-term interest rates. In the US, the 10-year government bond yield fell. In the euro area, the benchmark 10-year rate fell in Germany, in France, in Italy and in Spain.

Equity markets rebounded strongly in January

“After falling sharply in December 2022, equity markets rebounded strongly in January, benefiting from hopes of a soft landing for the global economy thanks to persistent signs of resilience in activity,” underlines the Luxembourgish economist. The end of the zero-covid policy in China was particularly favourable for Asian equity markets, which had performed poorly in the second half of 2022. “At the sector level, investors' renewed risk appetite was particularly beneficial to growth stocks, with consumer discretionary, communication services and technology posting the strongest gains during the month. In contrast, defensive sectors such as healthcare, utilities and consumer staples even performed negatively despite the general rebound in equity markets,” concludes Guy Wagner.

Guy Wagner, Chief Investment Officer

Originally from a family of entrepreneurs in Luxembourg and with a degree in Economics from the Université Libre of Brussels, Guy joined Banque de Luxembourg in 1986, where he was successively responsible for the Financial Analysis and Asset Management departments, then became Managing Director of BLI - Banque de Luxembourg Investments, an asset management company newly created in 2005.

From July 2022 on, he devotes himself exclusively to his role as Chief Investment Officer, to the management of the portfolios and to the management of the team in charge management of the various funds.

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