U.S. Economy Slows, but Europe’s Picks Up, Raising Hopes World Will Avoid Recession
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U.S. Economy Slows, but Europe’s Picks Up, Raising Hopes World Will Avoid Recession

China’s reopening could further support the global economy this year but raises inflation risks

Wed, Jan 25, 2023 8:50amGrey Clock 4 min

Two of the world’s largest economies moved in opposite directions at the start of the year, with U.S. businesses reporting further declines in activity in January while the eurozone saw a modest pickup.

The divergence suggests that while the U.S. economy continues to lose momentum, Europe’s could be stabilising, at least for now. The pace of contraction in U.S. firms slowed in January, according to new business surveys released Tuesday, a possible signal that the economy could be bottoming out, thanks to slowing inflation and resilient demand.

Combined, the surveys point to a global economy that looks likely to slow this year but could avoid recession. The receding threat of energy shortages in Europe, a still-growing U.S. economy, and China’s postpandemic reopening could offset the effect of higher prices and interest rates and keep the world from a steep downturn.

In the U.S., the economy continues to expand late last year, despite the Federal Reserve’s string of interest-rate increases designed to cool the economy and bring inflation under control. Higher rates have weighed heavily on certain sectors and could be causing households to pull back.

Home sales fell almost 18% in 2022 from the previous year. Retail sales were down 1.1% in December and the labour market, while still vibrant, is starting to show cracks. Employers have shed temporary workers for five straight months. Some economists see lower temporary payrolls as a precursor to a broader decline in employment.

Yet economists estimate the U.S. economy grew at a seasonally adjusted annual rate of 2.8% in the fourth quarter of last year, down slightly from 3.2% in the third quarter. Inflation, which hit a four-decade high last year, is cooling. Consumer prices rose 6.5% in December from a year earlier, down from a 2022 peak of 9.1% in June.

The Commerce Department will release fourth-quarter gross-domestic-product data on Thursday.

Until recently most economists had seen the eurozone as likely to enter a recession this year after energy bills soared because of the Ukraine war.

But the combination of a mild winter, energy-conservation efforts, moves by governments to find new natural-gas suppliers and hundreds of billions of euros in fiscal support appear to have propped up the eurozone economy.

On Tuesday, S&P Global said its composite output index for the U.S., a closely watched survey of business activity, was 46.6 in January, a slightly slower pace of contraction from December’s index of 45. In Europe, the index rose to 50.2 from 49.3. A reading above 50 points to an expansion while a reading below that level points to a contraction.

“A steadying of the eurozone economy at the start of the year adds to evidence that the region might escape recession,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

The U.S., on the other hand, “has started 2023 on a disappointingly soft note,” he said. “Although moderating compared to December, the rate of decline is among the steepest seen since the global financial crisis.”

Monetary policy could explain some of the divergence and could point to more trouble ahead for Europe, according to Jennifer McKeown, chief global economist at Capital Economics.

While the Federal Reserve has raised interest rates by more than 4 percentage points since March to a range of between 4.25% and 4.5%, the European Central Bank has moved at a slower pace, pushing up its policy rate by 2.5 percentage points starting in July.

Rates in Europe have further to rise while the U.S. may be nearing the end of its rate-increase cycle, she wrote in a note to clients Tuesday.

“Some of this pain has yet to come in the eurozone,” she wrote. “However, the region may avoid a recession or, if there is one, it seems likely to be milder than we had feared.”

The surveys of U.S. purchasing managers found that higher interest rates and persistent inflation weighed on demand in the manufacturing and service sectors. But employment continued to rise as companies worked through their backlog of orders.

In Europe, the surveys pointed to a further easing of price pressures in January, as business costs rose at the slowest pace since April 2021. The eurozone’s annual rate of consumer-price inflation eased for the second straight month in December and further declines are expected this year.

By contrast, January’s composite output index for the U.K. fell to 47.8 from 49.0 to reach a two-year low. That was a sign that the country’s economy may lag behind other parts of Europe as businesses grapple with a shortage of workers, the impact of interest-rate rises by the Bank of England that started at the end of 2021, and the continuing drag on business investment caused by its exit from the European Union.

Elsewhere, China lifted many of its zero-tolerance pandemic controls in early December in an abrupt change of course. While that led to an increase in Covid-19 infections and deaths, it also opened the door to a sharp economic rebound in the world’s second-largest economy, which suffered its weakest expansion in four decades in 2022.

“The relaxation of China’s strict zero-Covid policy has boosted growth prospects, whilst the warmer weather in Europe has helped temper the intensity of the energy crisis,” economists at Investec wrote in a note to clients as they raised their forecast for global economic growth this year to 2.4% from 2.2%.

But China’s reopening also presents a risk to the global economy. The release of pent-up demand could drive up the price of oil and other commodities, which could put renewed pressure on global inflation. That, in turn, could force central banks to keep interest rates high, which would weigh on growth.


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Only 5% of U.S. Foundations Invest for Impact, Study Finds
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Few of the U.S.’s philanthropic foundations invest their endowment assets—totalling an estimated US$1.1 trillion—to create positive social and environmental change in addition to high returns, potentially limiting or even counteracting the good such organisations do.

Exactly how few isn’t precisely known. But Bridgespan Social Impact, a subsidiary of the New York-based Bridgespan Group along with the Capricorn Investment Group, a Palo Alto, Calif.-based investment firm founded by Jeff Skoll , the first president of eBay, and the Skoll Foundation, also in Palo Alto, attempted to “get the conservation started,” with a study of 65 foundations with a total of about US$89 billion in assets, according to Mandira Reddy, director at Capricorn Investment Group.

The top-line conclusion: 5% of the primarily U.S.-based foundations surveyed invest their assets for impact. Most surprising is that 92% of these organisations, which have assets ranging from US$11 million to US$16 billion, are active members of impact investing groups, such as the Global Impact Investing Network and Mission Investors Exchange.

“If there’s any pool of capital that is best suited for impact investing, it would be this pool of capital along with family office money,” Reddy says.

The study was also conducted “to draw attention to the opportunity,” she said.

“We want to redefine what philanthropy can achieve. There is massive potential here just given the scale of capital.”

Foundations are required by the U.S. Internal Revenue Service to grant 5% of their assets each year to charity; in practice they have granted slightly more in the last 10 years—an average of 7% of their assets, according to Delaware-based FoundationMark, which tracks the investment performance of about 97% of all foundation assets.

The remaining assets of these foundations are invested with the intention of earning the “highest-possible risk-adjusted financial returns,” the report said. Those investments allow these organizations to grant funds often in perpetuity.

Capricorn and Bridgespan argue that more foundations, however, need to “align their capital with their missions,” and that they can do so while still achieving high returns.

“Why wait to distribute resources far into the future when there are numerous urgent issues facing the planet and communities today,” argue the authors of a report on the research, which is titled, “Can Foundation Endowments Achieve Greater Impact.”

The fact most of the foundations surveyed are very familiar with impact investing and yet haven’t taken the leap “highlights the persistently untapped opportunity,” the report said. It details some of the barriers foundations can face in shifting to impact, and how and why to overcome them.

Hurdles to making a shift can include “beginner’s dilemma”—simply not knowing where to start—and a misperception on the part of large foundations that impact investing is “too niche,” offering opportunities that are too small for the amount of capital they need to allocate. Other foundations are too stretched and don’t have the resources to add capabilities for making impact investments, the report said.

One of the biggest concerns is financial performance. Some foundation leaders, for instance, worry impact investments lead to so-called concessionary returns, where a market rate of return is sacrificed to achieve a social or environmental benefit. Those investments exist, but there are also plenty of options that offer financial returns.

The authors make a case for foundations to “go big,” into impact to realize the best outcomes, and to take a portfolio approach, meaning integrating impact principles into how they approach all investments. To make this happen, foundations need to incorporate impact into their investment policy statements, which determine how they allocate assets.

It will be difficult for foundations that want to shift their assets to impact to pull out of investments such as private-equity or venture-capital funds that can have holdings periods of a decade. But with a policy statement in place, a foundation’s investment team can reinvest this long-term capital once it is returned into impact investing options, she says.

“The transition doesn’t happen overnight,” Reddy says. “Even if there is a commitment for an established foundation that is already fully invested, it takes several years to get there.”

The Skoll Foundation, established in 1999, revised its investment policy statement in 2006 to incorporate impact. According to the report, the foundation initially divested of investments that were not in sync with its values, and then gradually, working with Capricorn Investment, began exploring impact opportunities mostly in early-stage companies developing solutions to climate change.

“As the team gained more knowledge and experience in this work, and as more investment opportunities arose, the impact-aligned portfolio expanded across different asset classes, issue areas, and fund managers,” the report said.

As of 2022, 70% of the Skoll Foundation’s assets are in impact investments addressing climate change, inclusive capitalism, health and wellness, and sustainable markets.

Capricorn, which manages US$9 billion for foundations and institutional investors through impact investments, constructs portfolios across asset classes. In private markets, this can include venture, private equity, private credit, real estate, and infrastructure. There are also impact options in the public markets, in both stocks and bonds.

“Across the spectrum there are opportunities available now to do this in an authentic manner while preserving financial goals,” Reddy says.

Of the foundations surveyed, about 15, including Skoll, have 50% or more of their assets invested for impact. Others include the Lora & Martin Kelley Foundation, the Nathan Cummings Foundation, the Russell Family Foundation, and the Winthrop Rockefeller Foundation.

Though not part of the study, the California Endowment just announced it was going “all in” on impact. The organisation has US$4 billion in assets under management, which likely makes it the largest foundation to undergo the shift, according to Mission Investors Exchange.

Although the researchers looked at a fairly small sample set of foundations, Reddy says it provides data “that is indicative of what the foundation universe” might look like.

“We cannot tell foundations how to invest and that’s not the intent, but we do want to spread the message that it is quite possible to align their assets to impact,” she says. “The idea is that this becomes a boardroom conversation.”


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