26 Oct 2022 3 min read

The three barriers to economic growth today – and how they can be overcome

By Emiel van den Heiligenberg , Tim Drayson

Several major factors are weighing on economic growth today. How could these problems be resolved, and how likely are we to see solutions?


Persistently high inflation. The Russia/Ukraine conflict. China’s economic slowdown. The International Monetary Fund (IMF) has identified this trio as the biggest barriers to global economic growth today, leading to what it called an “increasingly gloomy and uncertain outlook”.1

We agree with the IMF’s assessment. Arguably, rising interest rates and tightening credit conditions will be the drivers of the economic slowdown, but ultimately the rising cost of living is behind these factors.

In terms of what this means for the economy in the short term, we believe the US will enter recession in spring 2023 – albeit a relatively mild one – with a 1% drop in output from the peak to trough.

Let’s examine the three factors in turn, and what will need to happen for each barrier to fall.

Inflation: hope on the horizon

In a recent blog we explained why we believe core US inflation likely peaked at 6.6% in September.

We believe softer data is coming soon, and this should allow the Federal Reserve (Fed) to downshift the pace of its hiking in December and again in January before stopping.

If we are wrong and the data remain firm, the Fed will likely keep going to 5%. Either path leads to recession in 2023.

Ukraine: no easy answers

Regarding the war in Ukraine, the physical conflict is may lessen or even pause over the winter months.

A sustainable peace deal seems very unlikely at this point as neither side has a reasonable off ramp. Further escalation via cyber war could still happen over winter.

A peace deal or prolonged ceasefire would be a surprise and clearly good news. For markets, it would likely lead to lower commodities prices, a stronger euro and outperformance of European equities, in our view.

China: slow progress on COVID-19, property stimulus, political risks

We don’t expect a sudden reversal in Chinese policy. But we expect Beijing’s zero-COVID approach to ease in 2023, and targeted support for the property sector to remain in place.

A massive stimulus package that would boost growth is not impossible, but unlikely, in our view.

The latest Communist Party congress resulted in a strengthening of Xi Jinping’s power base, with the seven-member standing committee of the politburo now comprising entirely of supporters of the Chinese president. We’ll cover this development in detail in an upcoming blog, but the concentration of power could raise the risks of policy errors.

Where this leaves markets

A lot of pessimism already appears to be priced in to markets, given anticipation of further significant rate hikes to come. This offers investors some ground for hope, as ‘peak pessimism’ often signals a market trough.

However, the overall investment environment remains far from favourable. We’re caught in a vicious circle of risk aversion leading to illiquidity leading to further risk aversion; the odds of global recession are rising; earnings expectations remain too high, in our view; and already-high geopolitical risks continue to rise.

As a result, we remain short credit and commodities, and neutral on equities and risk overall as we brace for the months ahead.

[1] Source: https://www.imf.org/en/Blogs/Articles/2022/07/26/blog-weo-update-july-2022

Emiel van den Heiligenberg

Head of Asset Allocation

Emiel is responsible for the overall strategic direction of the team’s investment and business strategy. He claims to have been a promising lightweight rower at university until French fries got the better of him. Reflecting his love for rowing in a team, he firmly believes that excellence can only be achieved by a great team made up of motivated individuals that are also eager to work together. To this end he is the self-proclaimed inventor of the verb 'teaming' to acknowledge that shaping a top team and culture of excellence is an ongoing process. Outside of work-family obligations, Emiel’s spare time is filled by a passion for shark diving and skiing. Prior to dedicating his career to portfolio management in 1996, Emiel worked as a policy adviser in the Dutch Ministry of Finance and he graduated from Tilburg University in the Netherlands ages ago. When not glued to his Bloomberg screens, this Dutch man is hooked on computer games, peanut butter and his favourite dark beer made by Belgian monks.

Emiel van den Heiligenberg

Tim Drayson

Head of Economics

Tim keeps a close watch on global economic developments, with a particular focus on the US. He believes nothing good ever happens after midnight, which is why he is rarely spotted out late. Tim joined in 2008 from the number-one ranked economics team at ABN AMRO, with prior experience from HM Treasury, and graduated with a MSc from the University of Nottingham. When not crunching economic data, he can be found studying the weather forecast, analysing his cycling statistics or looking anxious on three-foot putts.

Tim Drayson