Economic and Strategy Viewpoint - Q4 2022
We set out our 2023 forecasts in which we expect recessions in the advanced economies as a necessary condition for taming inflation.
Authors
2023 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 the year as a whole. The emerging markets have also been downgraded, but we still expect a modest pick-up in 2023 as China revives.
Inflation is expected to decline in the course of the year 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 2023 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 the year.
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. With Beijing softening its stance towards its zero-Covid policy and the property sector and with policy support starting to take effect, a shallow cyclical recovery remains on the cards.
The full document is available below.
Important Information
The contents of this document may not be reproduced or distributed in any manner without prior permission.
This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.
Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.
This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.
Authors
Topics