Recession looms for 2023

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Economic and Strategy Viewpoint

• The coming year is expected to be one of recession for the advanced economies with the eurozone now expected to join the US and UK in recording a fall in output for 2023 as a whole. The emerging markets have also been downgraded, but we still expect a modest pick-up here in 2023 as China revives.
• Inflation is expected to decline in 2023 in response to weaker growth and the creation of spare capacity in the advanced economies. Stable commodity prices and an easing of supply bottlenecks also help ease inflationary pressures.
• Although inflation is not expected to return to target until 2024 this should not prevent central banks from easing policy. The US Federal Reserve (Fed) is likely to ease toward the end of next year and we anticipate the European Central Bank (ECB) and Bank of England (BoE) to be cutting in 2024.
• The US is expected to go into recession at the beginning of 2023 as the impact of tighter monetary policy weighs on activity. Fed policy reduces demand, squeezes prices and profit margins resulting in higher unemployment. Inflation and profits fall as a consequence allowing rate cuts toward the end of 2023.
• Europe’s economy continues to show greater resilience than expected, and while Russia has stopped exports of natural gas, forward planning and milder weather has limited the spike in wholesale prices and inflation. Yet, the ECB is keen to head off a wage-price spiral, and is tightening policy further in coming months. The forecast has become more stagflationary, though not withstanding another difficult winter, the economy is expected to rebound in the second half of 2023.
• The UK has endured a self-inflicted crisis, when the now former prime minister and chancellor irresponsibly announced huge fiscal stimulus, with little regard to how it would be funded. Much of this has now been reversed, but it forced the BoE to step in to provide liquidity to pension funds. Growth has been downgraded and inflation revised up, as we expect the BoE to raise its base rate to 4% in early 2023, and keep it on hold until early 2024.
• We continue to expect China to recover and grow 5% in 2023. The economy faces headwinds from slowing exports, rising Covid cases and problems in housing. But with Beijing softening its stance towards the latter two issues and policy support starting to take effect, a shallow cyclical recovery remains on the cards.