Recession Fears Decrease: Natixis

A study led by Natixis' Investor Insight Center found that many economic analysts see the risk of recession as low. However, market challenges are contributing to an uncertain closing for the year.

Natixis' study found that 50% of the surveyed macroeconomic strategists see a low risk of recession in the second half of the year, while 19% see a significant risk. “Recession is still a real possibility, but we are expecting a soft landing. The achievements of the first half may dissipate, but our strategists and economists still believe that there are good opportunities if the outlook is carefully observed,” says Mauricio Giordano, General Director, Natixis México.

The risks of recession vary by country. For example, 34% of the analysts surveyed see the US as better positioned for the rest of the year. About 22% see Japan and emerging markets as well positioned to avoid recession. 

Globally, inflationary pressures appear to be easing due to the central banks' efforts. According to Natixis, US inflation decreased from 6.5% in June 2022 to 3% by mid-2023, while the EU witnessed a decline from 9.2% to 5.5%.  The UK saw inflation drop from 10.5% to 8.7% in May.

According to Natixis, 38% of the financial strategists that were surveyed believe that inflation targets are not likely to be achieved until 2025, while 9% even speculate it might take until 2026. Concerns about extended inflation stem from robust consumer spending, inflated service costs and geopolitical tensions, possibly leading to higher interest rates for some time. 

In terms of investment, large-cap companies are expected to outperform small-cap firms, partly due to stricter credit regulations implemented after the recent banking crisis. Bond market yields have rebounded in 2023, reaching levels unseen since the global financial crisis. For example, yields on 10-year US Treasury bonds reached 3.84% in June, while those of the EU’s core bonds hit 3.21%.

Despite these promising trends, 72% of fixed income investors remain concerned about prolonged inflation, with 38% estimating higher-than-expected interest rates.

During times of economic uncertainty and recession, foreign investors may become more cautious and reduce their investments in Mexico, potentially affecting the flow of foreign direct investment (FDI) into the country. A recession could also expose vulnerabilities in Mexico's banking and financial sector. Non-performing loans may increase, affecting the stability of financial institutions and potentially leading to the need for government intervention to safeguard the financial system.

Mexico's export-oriented economy, highly dependent on trade with the US and other countries, is closely tied to global economic conditions. The potential repercussions of a recession depend on various factors, including the recession's severity and duration, the Mexican government and central bank's policy responses, as well as the global economic conditions.