Summary

There are downside risks to global growth in 2023 as central banks are expected to keep tightening monetary policy to slow persistent inflation. Just how much economic pain central banks will have to risk before they potentially pivot will depend on the inflation outlook. Emerging evidence suggests inflation may have peaked, but the speed at which it decelerates will be a key focus for investors.

ADVANCED ECONOMY RECESSION PROBABILITY

Recession expected, a matter of when and how deep

Qrtly-Econ-Update_Q3-2022-graph

Source: IFM Investors, Bloomberg, IMF, Macrobond

To date, there has not been widespread evidence of outright wage-price spirals that would entrench inflation. But in jurisdictions where wages have accelerated materially, central banks must act at the margin given how prominent labour costs are for many businesses. The supply shocks from the pandemic and energy costs are also clearly having an indirect impact, pushing prices higher.

Risks to the outlook abound, given domestic economic uncertainties and continued geopolitical tensions. The evolution of the Russia-Ukraine conflict and China’s COVID zero policies are key unknowns. We have asserted since the depth of the pandemic that economies will be likely to recover to some sort of post-global financial crisis malaise. While there has been much more volatility than we expected as this occurs, the coming year will be a step towards that environment. The global economy has experienced the upside in the immediate post-pandemic recovery and 2023 threatens to be the hangover that we had to have.