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According to Steven Wieting, chief investment strategist and chief economist at Citi Global Wealth, the global economy does not need a “collapse” to bring inflation back to target and return to sustainable growth.
Major economies have proven surprisingly resilient to sharp interest rate hikes by central banks over the past two years. This was particularly clear in the USA, where a recession has so far been avoided and the labor market has remained robust.
Talks are now turning to interest rate cuts as inflation remains on a downward trend towards central bank targets while growth has slowed.
Wieting told CNBC's “Squawk Box Europe” on Monday that he was optimistic that the global economy would not need an “economic collapse” to curb inflation.
“We had a huge shock – a pandemic, a collapse. We didn’t need two recessions to ultimately solve our inflation problem,” he said.
“It is currently slowing parts of our economy – there are declines in manufacturing and trade worldwide – but these are likely to bottom out later this year.”
Headline U.S. inflation was 3.4% year-on-year in December, above the Federal Reserve's 2% target but falling well below the peak of 9.1% in June 2022.
Investors will be closely watching Friday's personal consumption expenditures (PCE) inflation rate, the Fed's preferred measure, for further clues on when the central bank will begin cutting interest rates.
Meanwhile, a preliminary fourth-quarter GDP estimate is scheduled for Thursday, with the economy expected to have grown 1.7%, the slowest rate since the 0.6% contraction in the second quarter of 2022.
“This period of slower global growth and slowing job growth in the United States can, in our view, pass and lead to a healthier period of growth as we look particularly to next year and beyond, and that is this year's deal for investors,” said Wieting.
He stressed that while there are surpluses that need to be eliminated from the economy, this is not the result of “real overheating” or a sustained “boom” but rather excessive government stimulus related to the recovery from the pandemic, which is not the case is repeated.
“If you look at the money supply in the United States, it fell 4% last year. Look at the 1970s: there was almost 10% growth throughout the decade, key prices rose 14% each year – that is … persistent inflation,” said Wieting.
“This story of all this government spending coming and going – upheaval in supply and demand, consumer spending rising or falling 30% between goods and services during the pandemic – that is no longer the environment we are in. “