Markets have recovered massively in January, boosted by lower inflation and optimistic estimates of growth. The Chinese recovery is a key factor for this optimism, as well as the relief in European sentiment as the euro area may escape recession. These are factors that may prove to be a mirage for markets. All these news may reduce the risk of recession, but not the reality of stagnation.

Lifting Europe from deep recession to stagflation because of a mild winter is not a bullish signal. Furthermore, the Chinese reopening certainly helps the insipid global growth outlook, but it may also perpetuate elevated inflation. We cannot forget that the widely cheered inflation figure of November and December comes from weaker global demand for commodities, and the Chinese reopening means a huge boost to oil, coal, natural gas and copper demand in a moment where inventories remain below the five-year average.

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We discuss:

• Macroeconomics
• Markets
• Monetary Policy

The latest jobs report in the United States shows strengths and weaknesses. Total nonfarm payroll employment increased by 223,000 in December, and the unemployment rate fell to 3.5 percent. However, the United States job market continues to show negative real wage growth, the employment-to-population ratio is 60.1 percent, and the force participation rate is 62.3 percent. According to the BLS, both measures have shown little net change since early 2022 and each remain 1.0 percentage point below their values in February 2020.

The United States jobs figures are constantly dissected by analysts and there is a healthy criticism in independent research which certainly helps enormously when it comes to understanding the health of the labour market. However, in the European Union things are much worse.

The IMF has warned about the optimistic estimates for 2023, stating that it will likely be a much more difficult year than 2022.

Why would that be? Most strategists and commentators are cheering the recent decline in inflation as a good signal of recovery. However, there is much more to the outlook than just a moderate decline in inflation rates.

Inflation is accumulative, and the estimates for 2023 and 2024 still show a very elevated level of core and headline inflation in most economies. The longer it remains this way, the worse the economic outcome. Citizens have been living on savings and borrowing to maintain current levels of real spending. But this cannot be last for many years.