Global outlook

Global growth is expected to weaken further in 2023 as several countries in developed market (DM) economies fall into recession but at varying degrees of intensity. Both DMs and EMDEs will battle to reach at least the 3% per year growth necessary to double per capita incomes for a generation. The world economy is estimated to grow by 2.1% in 2023, a big slowdown from the more than 6% growth of 2021 and a significant decline from the 3.2% growth expected for 2022. By the end of 2024 GDP levels in EMDEs will be about 6% below the level expected before the pandemic.

The US economy will likely avoid a recession given the sharp moderation in core personal consumption expenditure (PCE) inflation which is expected to come down from 5% in 2022 to about 3% in 2023. More so, the persistent resilience of the labour market suggests a gradual rise in the unemployment rate of about half a percentage point in the near term. While there are indications that the labour markets have passed their peak, with the significant decline in job vacancy rates, the headline average wage earnings, at about 5.0%, are above levels consistent with interest rates.

The euro area is likely to experience a mild recession of -0.1% in 2023, induced by the surge in household energy bills which have eroded real incomes. More so, during the energy crisis, the gas inventory in the European Union (EU) is currently around 80%, well above the historical trend of 50% during the typical winter season, which has been warmer than expected. In addition, household energy savings and the substitutions of energy sources helped to buffer the collapse in Russian gas imports. Although it must be noted that no recession is painless, particularly when considering the combination of lower growth, the bite of high inflation and the spending constraints it comes with. As such, we do not expect a marked rebound in real GDP when the economy exits the recession in 2024.

The UK recession will likely be the worst and it will lag further behind its major counterparts. The economy is expected to shrink by 0.9% in 2023 as the economy contends with sky-high energy costs coupled with policy tightening and a robust labour market. However, a recovery is expected to materialise in 2024, although it will be the only G7 economy smaller than before the pandemic.

China’s economic growth outlook will be a tale of two halves. It will be gradual in the first half of 2023 before momentum builds in the second half due to the continued weakness in the property market as well as the bumpy reopening that brings the risk of infection flare-ups which may increase caution among individuals. The lifting of the zero-Covid tolerance regulations will result in a more pronounced rebound from Q2 2023 onwards when more people feel comfortable with returning to the open and infections subsidy. Real gross domestic product (GDP) growth is projected to average 4.8% this year as the ongoing drag of the property market subtracts about 1.5 of a percentage point from growth.

In many countries, inflation has started to come down, with some evidence that global inflationary pressures have peaked. However, it remains pervasive despite all the aggressive efforts by major central banks to bring inflation down. Thus it will be a long way to revert to the typical 2.0% target as it were before the pandemic shock. That means that central banks are not yet done with their rate hikes, and many will want to keep their rates in the restrictive territory to ensure the inflation genie is contained in the bottle. Globally, inflation will ease to 5.2% in 2023, led by the significant easing in DM inflation which is expected at 5.3%, while EMDE inflation will average 6.3%. The moderation in price pressures will continue in 2024 for advanced economies, remaining sticky for EMDEs.

In particular, US headline inflation is expected to halve in 2023, while in the euro area it will drop by 2.4 percentage points to an average of 6.0%. Inflation will remain sticky in the UK at 7.2% in 2023. While price pressures will ease further in these countries in 2024 as the recession effect kicks in, full-year inflation will remain above central bank targets and continue to weigh on real income, consumption and industrial production.

For China, we do not expect a significant surge in prices considering their delayed reopening will result in muted aggregate demand. This is because, unlike advanced economies, the Chinese government did not provide stimulus to the economy during the height of the pandemic, so the rebuild should be gradual given the fears that come with a reopening. Therefore we expect the inflation rate to remain around 2% over the medium term.

Looking at long-term inflation expectations, particularly for the US, we note that they are anchored relative to the global financial crisis, while short-term inflation expectations remain relatively high but not for long as much of the elevation reflects the spike in commodity prices will soften as prices level off. This also suggests that the elevation in inflation during a pandemic period has lasted shorter than usual, implying that inflation is not embedded.

As inflation shows signs of coming down, major central banks’ interest rates are expected to peak by the end of the first half of this year as inflation ease due to low base effects, easing supply bottlenecks as China reopens and easing commodity prices due to growing global growth concerns. The US Fed funds rates are expected to peak at 5.0% in Q1 2023. However, there is a wider range of views in terms of how strong and resilient the economy is, with a general skew towards the

Fed having to raise rates above 5.0% in in Q1 2023. The European Central bank (ECB) interest rates are expected to peak at 3.5% by the end of H1 2023 while the Bank of England (BoE) interest rates are expected to peak at 4.5% in H1 2023 as inflation remains sticky. In contrast, the People’s Bank of China (PBoCs) is expected to embark on the expansionary monetary policy to boost coronavirus hit economy.

Major central banks

Probability: 25%

Inflation falls faster than expected, allowing a pivot toward rate cuts sooner.

Probability: 50%

Easing inflation allows major central banks to complete their hiking cycles in H1 2023 at the latest.

Probability: 25%

Inflation fails to fall back to target, delaying rate cuts or forcing further rate hikes.

Economic growth

Economic activity reaccelerates due to easing geopolitical turmoil, revision of the zero-Covid policy and faster-than-expected decrease in inflation.

Geopolitical turmoil

Global financial markets

Russia-Ukraine conflict resolved. Global financial markets rally as investors favour risky assets.

Source: Alexander Forbes Investments (January 2023)

The US economy slows, while the Eurozone and the UK are already in recession. China’s recovery continues to be delayed.

The war in Ukraine drags on and keeps markets volatile. Volatility lingers due to weaker growth expectations.

Growth falls more sharply than expected due to tight monetary policy and inflation continuing to outpace wage growth, while China sticks to its zero-Covid policy.

The war in Ukraine escalates as US-China tensions intensify.

Bear rally intensifies, with riskier asset classes such as equities posting double-digit losses. Credit spreads widen, while safe havens benefit.