About the author: Gregory Dako He is chief economist at EY and former chief US economist at Oxford Economics. The opinions expressed in this article are those of the author and do not necessarily represent the views of Ernst & Young LLP or other members of EY Global.
Understanding the global economy becomes more complex as we enter 2023, and the consensus view of a mild recession will be challenged in the months ahead. The reason is simple. While a mild recession is a good average forecast, it is by no means the most likely.
In one scenario, the ongoing war in Ukraine and sanctions against Russia, multi-year high interest rates, falling global stock prices, high financial market volatility, and simultaneous slowdowns in Europe, Latin America, North America, and Asia will push the global economy into recession in 2023. In this environment, deteriorating trade, investment, and financial market conditions would amplify the shock so that the global recession is greater than the sum of individual regional recessions.
Instead, in a soft landing scenario – where economic activity cools enough to allow inflation to ease toward central banks’ targets – the global economy experiences a period of slower growth in the first half of the year but emerges with stronger momentum during the first half of the year. summer through 2024.
A lot of ink has already been poured on downside risks to the forecast, so it is important to highlight three main factors that could lead to the most optimistic scenario. Doing so is not about putting on rose-tinted glasses, but instead observing recent global developments with a curious eye toward possibility.
The three factors to watch closely are the relative resilience in business and consumer activity in the US, the very mild winter in Europe, and the abrupt abandonment of the zero Covid policy in mainland China.
In the US, final demand is now clearly weak. The tighter financial and credit conditions brought about by the Fed’s aggressive tightening cycle are forcing CEOs to re-evaluate their investment decisions and talent needs for 2023. But with so much effort invested in hiring and training over the past 18 months, CEOs are reluctant to let go of the pool. their precious talents. As such, layoffs remain low, and instead companies are considering hiring cuts along with wage growth pressure to reduce labor costs.
The December jobs report reflected this gentle easing in labor demand. The three-month moving average of job gains fell to a respectable 247,000 hours worked, hours worked fell to a pre-pandemic level, and temporary employment shrank for the fifth month in a row. With the economy adding 4.5 million jobs in 2022 and the unemployment rate stable at a 50-year low of 3.5%, the job market remains very strong.
Consumer spending activity also showed signs of resilience. This is true even as households—particularly lower-to-middle-income families—exercise more discretion in their purchases and benefit increasingly from savings and credit in the face of ever-high inflation. Real consumer expenditures were still rising at a healthy pace of 2% at the end of 2022 compared to the previous year.
December’s reading of average hourly earnings for private sector workers will no doubt be a welcome development for Fed policymakers looking for evidence of success in their fight against inflation. The combination of softer monthly momentum in wages along with the lowest post-pandemic wage growth reading of 4.6% y/y should reassure the Fed that the continued slowdown in the pace of monetary policy tightening – with the possibility of a quarter-point rate hike in early February – has guarantee.
Evidence of easing inflationary pressure in the coming months is likely to challenge the Fed’s hawkish narrative. It may even open the door to a recalibration of monetary policy, by offering cuts in interest rates before the end of the year – another catalyst for growth. This could happen despite the recently released FOMC Minutes statement that “no participant anticipated that it would be appropriate to begin lowering the federal funds rate in 2023.”
Meanwhile, Europe got an unexpected free pass with one of the warmest starts to the winter in years, if not decades. While these conditions certainly amplify climate concerns, warmer temperatures ease fears of an impending energy crisis as gas storage across Europe remains at high levels. Lower prices for natural gas, oil and electricity are easing cost-of-living pressures on families across Europe and will support consumer spending and manufacturing activity.
Purchasing managers’ indices across the Eurozone also point to a temporary pick-up in services sector activity. With consumers and business people becoming less pessimistic about the outlook and regional economies ending the year better than expected, activity could be less subdued in 2023. However, aggressive tightening of monetary policy and hawkish communication by the European Central Bank, coupled with growth Poor income, they argue against any premature celebration because they point to the region’s restricted economic prospects.
With the authorities in China apparently deciding that the economic benefits of a quick abandonment of the zero Covid policy outweigh the cost of the health crisis, the country is experiencing an unprecedented rise in the number of Covid infections and deaths. In the near term, this will severely restrict economic activity in China. But, while the hit to growth is likely to be significant in the near term, the government’s increasing resolve to favor growth-friendly policies along with increasing population immunity is likely to support a recovery in employment, consumer spending and industrial activity in the spring and summer. .
Overall, the implication for forward-looking financial markets is that while volatility is likely to remain omnipresent in the first half of the year, better market conditions may prevail once uncertainty about the immediate economic outlook dissipates.
If the most optimistic scenario materializes, the realization that a higher interest rate environment is likely to continue along with market revaluation and stabilization of foreign exchange markets should lead to increased transaction activity.
Guest reviews like this one were written by authors outside of Barron’s Newsroom and MarketWatch. Reflect the viewpoints and opinions of the authors. Send feedback suggestions and other feedback to email@example.com.