Interview, Podcast, Other
What’s ahead for economies and markets in 2023?
- A global soft landing in 2023 is deemed possible but not assured, with a 35% probability assigned to a recession occurring that year.
- The baseline U.S. forecast anticipates avoiding recession, driven by 3% to 3.5% real disposable income growth and diminishing drag from tightening financial conditions.
- Inflation expectations are viewed as well anchored, with rent measures expected to fall substantially in 2023 and core PCE inflation projected to reach 3% by year-end.
- Labor markets are expected to rebalance as job openings decline, leading to more sustainable wage growth, though tight labor capacity may limit growth re-acceleration.
- The Federal Funds Rate is forecast to increase by 25 basis points in February, March, and May, reaching 5.0% to 5.25% by the May meeting and holding there into 2024.
- Monetary policy normalization includes ECB deposit rate increases totaling 275 basis points to 3.25%, while the Fed is expected to cut rates meaningfully if a recession materializes.
- U.S. equities are currently priced at weak rather than recessionary levels, with a strong bull market considered difficult given high T-bill yields of 4.65% on a six-month basis.
- Yields are expected to rise moderately through 2023 after peaking in the fall of the previous year, with modestly positive bond returns anticipated in the central case.
- European growth is upgraded to positive for 2023 despite a projected small GDP decline in the fourth quarter, supported by lower gas prices and a strong Chinese rebound.
- China is forecast to grow at 5.2% annually in 2023 with a 7.2% Q4-to-Q4 increase, featuring a V-shaped recovery driven by a significant bounce back in the second quarter.
- The U.S. dollar is expected to weaken as it enters a period of decline following a peak observed in September or October of the previous year.
- Non-U.S. equities and Chinese equities are expected to benefit from tailwinds, showing significantly greater discounts compared to U.S. counterparts.
- Structural weaknesses in China and Europe pose risks over longer horizons, while the primary near-term risk remains a narrow path to a soft landing requiring precise policy calibration.
- An adverse scenario involving a recession could trigger multiplier effects, driving equity and credit market downside to lows seen last summer with deeper and earlier rate cuts.
- Market pricing currently reflects a distribution of outcomes including recessions, though the dominant narrative remains bearish relative to pricing, with inflation costs considered benign over the next three to four years.