Central Banks vs. Inflation is the name of the game in 2023, according to the annual Top 10 Economic Predictions hot off the press at S&P Global Market Intelligence.
“The degree of persistence of high inflation and the vigour of central bank efforts to subdue it will determine the extent of slowdowns in the advanced economies and potential spillovers to emerging and developing economies,” says S&P GMI’s executive director Sara Johnson.
There’s a pronounced slowdown in the post for global economic growth and Johnson’s team has picked out the 1o spanners most likely to end up in the works of everyone’s next 12 months.
Johnson reckons the relatively lacklustre post-COVID economic performances of the major markets of the northern hemisphere might find an offset down south, where our side of the planet appears likelier to get off our collective knees and arses first.
“While a global recession can be averted, Europe and North America are projected to experience mild contractions in real GDP.”
Enough said, really.
So here’s S&P Global Market Intelligence’s Top 10 economic calls for the year ahead.
Enjoy. I know I didn’t.
1. COVID-19
…is expected to continue its transition to a global endemic and the status quo to prevail in Russia’s war in Ukraine, with no material implications for the global economy.
COVID-19-related shortages should become less frequent, helping prices in affected goods to ease further over the year. The war in Ukraine will likely continue without major escalation through at least early summer, when a cease-fire may be achieved.
That scenario will not end the conflict and thus economic sanctions and voluntary embargoes will remain, but without causing renewed surges in commodity prices.
Looking ahead, softening global demand will be the dominant story and dampen inflation. While crude oil prices should ease over 2023, high energy costs will put a floor under the prices of processed materials and limit the decline in inflation.
2. Inflation
…will slow significantly in 2023, but achieving central bank targets will be a multiyear process.
After reaching multi-decade highs in 2022, global inflation will moderate in response to tightening financial conditions, softening demand, and easing supply chain conditions.
Yet, labor shortages and wage acceleration are contributing to the persistence of inflation, especially in services.
After picking up from 4% in 2021 to 8% in 2022, global consumer price inflation will likely ease to an average of 5% in 2023, finishing the year at a 3.5% year-on-year pace.
3. Global monetary policy tightening
…has further to go out heading to spring 2023 with much regional variation.
In the US, the federal funds rate is expected to peak near 5% in spring 2023. While the European Central Bank moderated the size of its rate increases in December, its accompanying guidance was more hawkish than expected, suggesting that policy tightening will continue well into 2023.
Monetary easing will likely begin earliest and be most pronounced in Latin America and emerging Europe.
We do not expect the Fed to reverse course until it is confident that inflation will decline toward its 2% objective, implying rate cuts only from 2024.
4. Mild recessions
…are forecast in the United States and Europe, but resilience in Asia Pacific will prevent a global recession.
Global real GDP growth is projected to slow from near 3% in 2022 to half that pace in 2023.
Moderate expansions in Asia-Pacific, the Middle East, and Africa will keep the global economy moving forward through 2023.
5. Housing markets
…will continue to weaken in the face of rising mortgage rates, but price declines may be tempered in some markets by still tight supplies relative to demographics.
Recession expectations and the cost-of-living crisis will further reduce demand and push prices lower in 2023, especially in overvalued markets. A market crash or full correction of price bubbles is not expected owing to the relative strength of labor markets.
However, a need for even higher interest rates to counteract persistent above-target inflation or a significant rise in unemployment would increase the risk of a crash. The highest risks are in Europe, the US, Canada, and Australia.
6. The US dollar
…has likely peaked and will retreat in 2023, but it will remain elevated compared with prior years:.
The US dollar is expected to depreciate under the weight of large US current-account deficits and subdued economic growth. The euro, which has weakened in response to the eurozone’s vulnerability to the impacts of the Russia-Ukraine war and cautious monetary policies, will recover gradually.
Meanwhile, some narrowing of US-Japan, long-term interest rate spreads and Japan’s comparatively mild inflation rate will lead to some unwinding of the yen’s sharp 2022 depreciation against the US dollar.
7. Emerging and developing economies (EMDEs)
…will remain resilient during 2023, but pockets of vulnerability will result in a two-tier growth path.
The risks of higher default rates among domestic borrowers and sovereign debt restructuring have increased, but a wave of crises remains unlikely.
As a region, Asia Pacific will benefit from lingering pent-up demand from the later lifting of COVID-19 lockdown measures, the resumption of pandemic-delayed infrastructure programs, relatively low inflation, and the modest recovery in mainland China’s growth.
In contrast, Emerging Europe will be severely affected by the slowdown in the eurozone and the continued impact of Russia’s war in Ukraine.
8. Mainland China
China’s easing of containment policies will propel a choppy economic recovery.
While financial markets may stage energetic rallies in response to the retreat of pandemic control policy, labor market scarring and consumer and business confidence deterioration caused by the policy will take time to mend.
9. Supply chain disruptions
…will ease markedly in 2023, but tensions from labor shortages will remain.
The recessions in Europe and North America that we anticipate in 2023 will help narrow the global supply-demand gap.
However, the easing of supply chain disruptions will likely be limited given labor shortages.
10. Labor shortages
…will remain a challenge in 2023 even as unemployment rates are predicted to rise modestly.
Economies that depended on migration for the provision of labor to keep their economies humming before the pandemic (the US, Canada, Western Europe, and Australia) will see migration flows improve, but probably not fast enough to head off capacity constraints.
Globally, hiring freezes will be more common than mass layoffs in 2023 as employers seek to retain talent.
Job losses will be concentrated in sectors that are sensitive to credit conditions, such as real estate and finance.