Top 10 Economic Forecasts in 2023
1. We anticipate that COVID-19 will continue to spread globally and that Russia’s conflict in Ukraine will proceed as usual, with no appreciable effects on the world economy.
Episodic shortages that hindered corporate planning and logistics and kept prices higher than they otherwise would have been are examples of the COVID-19 pandemic’s residual impacts. COVID-19-related shortages should become less common as the world enters 2023 and continues the transition to an endemic, assisting prices of afflicted items to decline further over the course of the year.
The Ukraine conflict’s future is still uncertain, which drives up prices for energy and other industrial commodities. We anticipate that the conflict in Ukraine won’t significantly escalate until at least the beginning of the summer, when a cease-fire may be reached. That scenario will not resolve the conflict and economic sanctions and voluntary embargoes will endure. We do not anticipate new increases in commodity prices as a result of that conflict or the responses of the West.
In the near future, declining global demand will be the main development, which will restrain inflation. While the price of crude oil should fall through 2023, high energy costs will act as a ceiling on the cost of processed commodities and restrain the rate of inflation decline.
2. 2023 will see a major slowdown in inflation, but it will take time to reach central bank goals.
In reaction to tighter financial conditions, weakening demand, and loosening supply chain circumstances, global inflation will decline after reaching multidecade highs in 2022.
Already, there are downward pressures on prices. The Materials Price Index, a thorough measure of industrial commodity prices, published by S&P Global Market Intelligence, has decreased by about 30% since it peaked in early March. Grain prices will be the main driver of the drop in agricultural commodity prices through 2023, which is already in its early stages. Declines in commodity prices will trickle downstream to semi-finished and finished goods in 2023, providing some respite to firms and consumers.
Nevertheless, the continuance of inflation, particularly in the services sector, is being fueled by labor shortages and wage growth. Margin restoration will be a top goal in several industries, such equipment, where price increases in 2022 did not keep pace with the rise of input costs.
To consistently reduce inflation rates to central bank targets could take several years. Inflation in consumer prices worldwide is predicted to slow to an average of 5% in 2023 and end the year at a rate of 3.5%.
3. Up until the spring of 2023, there must be more global monetary policy tightening with significant regional variance.
We anticipate the federal funds rate in the US will peak around 5% in the upcoming spring.
Although the European Central Bank (ECB) scaled back the rate rises in December, its accompanying guidance was more pessimistic than anticipated, indicating that the cycle of rate increases will last well until 2023.
The majority of central banks in the area usually follow ECB policies. As an exception, the BoE is subject to wage pressures similar to those in the US. However, recent fiscal restraint and worries about a property crisis suggest that the BoE will not go as far as the Fed given the already-established recession. In the spring of 2023, we anticipate a 4% bank rate peak.
Latin America and emerging Europe are likely to experience monetary easing first and in greater intensity. There, as inflation surged starting in 2021, central banks tightened policy relatively early and significantly. By mid-2023, we anticipate the Brazilian central bank to begin cutting interest rates.
We do not anticipate the Fed to change direction until it is certain that inflation will decrease toward its 2% aim, which suggests that rate cuts will only begin in 2024 and will be disappointing for those hoping for an easing of policy starting in late 2023. We see the same forecast for the ECB in general.
4. Mild recessions are predicted for the US and Europe, but Asia Pacific’s strength will stop a global recession.
The US has experienced a sharp monetary tightening as a result of persistently high inflation and unusually tight labor markets. This has led to higher Treasury term yields, wider spreads to yields on private bonds and mortgages, an appreciation of the US dollar, a decline in stock prices, a sharp turndown in home prices, and a notable rise in financial market volatility.
This broad and considerable tightening of financial conditions will cause the US economy to enter a mild recession in the first half of 2023, with a lag and against the backdrop of declining pandemic-era fiscal support.
In light of several headwinds and in line with recent Purchasing Managers’ IndexTM (PMITM) statistics, we predict relatively moderate recessions in the EU/eurozone during the fourth quarter of 2022 and the first quarter of 2023. Given the severe strain on household real incomes caused by unusually high inflation, private spending is the main cause of anticipated real GDP declines. Beyond the present winter, a more severe, energy-driven recession will continue to pose a concern.
As a counterbalance to the recessions in the US and the EU, the Asia Pacific area is predicted to have the fastest economic growth in 2023. This hypothetical situation incorporates improved growth expectations for mainland China and ongoing growth in other significant Asia Pacific countries, such as India and Southeast Asia. Australia, Indonesia, and Malaysia will continue to profit from high commodity export income, particularly for oil, liquefied natural gas (LNG), and coal. Since the US and the EU buy 27% of the region’s exports, these nations’ recessions will have a negative impact on the region’s economy.
Through 2023, the global economy will continue to grow moderately across Asia Pacific, the Middle East, and Africa. From a little under 3% in 2022 to half that rate in 2023, real GDP growth is expected to decrease.
5. The housing market will continue to deteriorate as a result of rising mortgage rates, but in some markets, the still-scarce supply in relation to demographics may act as a brake on price decreases.
Mortgage rates will continue to be high through 2023 as a result of the tightening of monetary policy. Consumers who had previously locked in cheap rates will choose to stay in their present homes as a result, and potential new homeowners will stay away because buying a home is no longer within their budget. In 2023, demand will be further decreased and prices will be driven lower, particularly in overheated markets, as a result of recession expectations and the cost-of-living crisis.
Due to the relative robustness of labor markets, we do not anticipate a market crash or a complete deflation of price bubbles. However, the probability of a crash would increase, resulting in deeper and longer recessions, if even higher interest rates were required to combat persistent inflation that was over target or a major rise in unemployment. In Europe, the US, Canada, and Australia, there are the greatest threats.
6. The US dollar has most certainly reached its high and will begin to decline in 2023, but it will still be strong compared to earlier years.
Supported by favorable interest rate margins and investors’ flight to safety, the US dollar appreciated significantly throughout the first ten months of 2022, reaching unsustainable heights against the yen, the euro, and other major currencies before pulling back.
Through the first half of 2023, the dollar will be supported by these factors. We anticipate the dollar will weaken as a result of the significant US current-account deficits and the muted US economic growth.
The euro will gradually rebound after experiencing a decline as a result of the eurozone’s susceptibility to the effects of the Russia-Ukraine war and cautious monetary measures. In the meantime, the steep devaluation of the yen versus the US dollar that began in 2022 will begin to unravel as long-term interest rate differences between the US and Japan begin to shrink and Japan’s relatively low inflation rate increases.
7. In 2023, emerging and developing economies (EMDEs) will continue to be resilient, although certain areas of weakness will lead to a two-tiered growth path.
The majority of the COVID-19 assistance measures expiring in 2022 along with higher interest rates in advanced economies will have an impact on EMDEs.
Higher domestic default rates and sovereign debt restructuring are now concerns, but a wave of crises is still unlikely. Real GDP growth will be more susceptible in EMDEs like Zambia, Malawi, and Belarus that have sluggish policy responses, heavier debt loads, and lower external reserves.
For low-income, debt-stressed nations, particularly those in sub-Saharan Africa, the likelihood of debt restructuring under the G-20 common framework is more likely than disorderly defaults.
Since the Asian Crisis of the late 1990s, Asia Pacific as a whole has pursued more cautious policies, resulting in more manageable debt levels and healthier external buffers. The continued pent-up demand brought on by the COVID-19 lockdown measures being lifted later, the restart of infrastructure projects delayed by the pandemic, the relatively low inflation rate, and the gradual comeback in mainland China’s economy will all be advantageous for the Asia Pacific region.
The downturn in the eurozone and the ongoing effects of Russia’s war in Ukraine, on the other hand, will have a significant negative influence on developing Europe.
8. The relaxation of containment measures in mainland China will fuel a shaky economic recovery.
The administration will move through with the withdrawal by striking a balance between easing public fatigue of containment measures and limiting potential public health damage from the exit, given the probable epidemic waves in the wake of policy changes.
While financial markets may exhibit ferocious rallies in response to the policy’s retreat, the real economy’s early recovery would be muted, necessitating the adoption of accommodating economic policies to smooth the rough road.
9. In 2023, supply chain interruptions will significantly lessen, but there will still be difficulties due to a labor shortage.
One of the things we can learn from the COVID-19 epidemic and the recovery that followed is that the global supply was not prepared for the tremendous demand shock that happened with the reopening of the world’s main economies.
We predict that the European and North American recessions in 2023 will contribute to a reduction in the global supply-demand imbalance. The process has already begun: according to S&P Global’s PMITM data, global supplier delivery times in the manufacturing sector in November were significantly lower than they had been at their peak in early 2022, with room to grow in some sectors—primarily those that produce equipment goods—as demand declines in 2023.
However, given the workforce shortages, there won’t be much relief for supply chain interruptions.
10. Even though 2023 is expected to see a little increase in unemployment rates, labor shortages will still be a problem.
The US, Canada, Western Europe, and Australia are among the economies that relied on migration for the supply of workers to keep their economies humming before the pandemic. Migration flows will likely improve, but probably not quickly enough to prevent capacity restrictions.
Along with a sustained gradual recovery of cross-country labor movement, the surge of workers who fled from urban to rural regions during the worst of the epidemic may take a while to return in emerging markets. The Gulf Cooperation Council nations are an exception because, due to the dearth of local labor markets, migration from South Asia and East Africa will continue to be essential in sustaining planned investments.
Emerging Europe is another exception; a sizable portion of the Russians and Ukrainians who left due to the war in 2022 will still be there in 2023, increasing the population and potential labor force of other nations in Europe and Central Asia. Nevertheless, due to skill gaps and limited progress in limiting inflation expectations, some countries face the threat of wage-price spirals.
In 2023, major layoffs will be less frequent than hiring freezes globally as firms try to keep talent. Job losses will be concentrated in industries like real estate and finance that are dependent on credit conditions.
Source: S&P Global Market Intelligence