The global economic outlook presented here is a collation of the consensus views of multiple large brokerages and asset managers globally, including the likes of Goldman Sachs, Citi Wealth, Morgan Stanley, and HSBC.
Key Takeaways:
1. There is high potential for a global recession in 2023 – with a marked impact on the Eurozone and UK, and a milder impact on the US.
2. Increasing geopolitical instability, and consequent trade measures implemented may have a positive effect on emerging economies through supply chain diversification.
3. Globally, inflation may persist at higher levels throughout the year, and hence defining the low probability of rate cuts by central banks in 2023.
4. China’s relaxation of COVID restrictions may bring a rebound in the services sector leading to a rise in economic activity, and consequently impacting global growth positively.
5. India is expected to outperform other emerging markets with moderation in inflation, resilient equity markets, competitive manufacturing, and favourable trade activity.
Summary of Estimates:
Overview:
Looking back, 2022 has been a year of tumult. Globally, growth slowed down driven by unpredictable geopolitical circumstances, high inflation, and monetary tightening by the central banks. These central themes that drove 2022 are expected to be with us as we head into 2023, a year expected to carry significant volatility.
Source: Citibank
Against this backdrop, there is a likelihood of a global recession in the coming year. The uncertainty factors make it difficult to predict the extent of this across various economies. Looking at the data that’s emerging, it seems probable that the milder effects will be seen in the US driven by the stability of the jobs market. Serious recession could be a scenario in the Eurozone and the UK, where the energy crisis looms. A shallow recovery of the Chinese economy is expected as COVID restrictions lessen.
As far as India is concerned, while on the one side, global headwinds are playing out which could have some implications, there are also significant tailwinds from the India growth story, both in the medium and the long term.
Some of the highlights of what we expect to see in 2023, as far as the global picture is concerned are:
– A decline in inflation without a sharp increase in the unemployment rates.
– This year, we could be on the brink of stagflation – rising prices with declining economic growth.
– Lower growth could lead to central banks starting to temper interest rate hikes by the 2nd half of the year. However, considering inflation is likely to remain above central bank targets, rate reductions may not happen.
– Continued geopolitical tensions arising from the Russia-Ukraine war and US-China polarization. Decline in global trade.
– Supply chain diversification and subsequent benefits to emerging markets arising from deglobalisation and trade wars.
Source: IMF
This year also anticipates the rise of several macro themes including a push for sustainability and the shift to green energy – given the energy supply constraints prevailing and blackout risks faced by Europe.
Outlook on Asset Classes:
Fixed Income: 2022 was a challenging year for fixed income, with the Bloomberg US Aggregate Bond index declining 20% surprising a lot of 60/40 (asset allocation) investors. Looking ahead, the bond market is expected to stabilise and recover some lost ground. However, considering the hawkish regime of central banks to tame inflation, bond market volatility may stay high in the near term. As the central banks’ rate hikes are expected to peak by the end of the first half with limited subsequent hikes, this might help bond markets stabilise.
Legend: DXY: dollar index, UKOIL: Brent Crude, DJI: Dow Jones Industrial Average, EEM: Emerging market Equity, AGG: Aggregate Bond Index
Currencies: The dollar strength has peaked, and Euro, Pound and other global currencies have partially regained their value. The government’s response to inflation will be the key governing factor for the currencies. UK’s wide fiscal spending made Pound Sterling achieve parity with the dollar for the first time in decades. Similar actions from other countries might play an important role going forward.
Private Markets: The decline in valuations for private capital is expected to be less substantial than in public markets. A disastrous performance by the 60/40 equities/debt portfolio in 2022 will likely impact allocation decisions. Venture capital/private equity funds could gain from this trend. Considering higher volatility and pricing, attractive acquisition opportunities could open for funds. Higher liquidity requirements of PE/VC funds could also bring higher opportunities in secondary deals.
Source: Blackrock
Commodities: Expecting a strong year for commodities due to China’s reopening and anticipated supply cuts in Oil and Natural gas from Russia. Geopolitical tension to govern the direction of commodities.
Real Estate: Disinflationary effect seen in housing and the prices have declined in US and UK. A fall in housing prices is expected to affect consumer sentiment contributing to the recession.
Public Equities: The environment will remain challenging for public equity markets, given the slowdown in overall economic growth rate, consequently impacting the potential growth of revenues. Further, the corporate profit margins will most likely experience significant compression as a result of various cost pressures, including the rising energy prices, increasing wages and more expensive financing costs – markets expected to remain near bottom through the first half of 2023. However, on stabilization of the interest rate regime, and reduced uncertainty, it is expected that quality growth companies reaping the benefits of headwinds from increasing rates will come out a top performers.
Regional Outlook:
North America:
There are chances of a recession in 2023 as the Fed’s monetary tightening successively affects housing, manufacturing, profitability, and employment. Before it picks up speed in 2024, the year should see very little positive average real GDP growth. Given this projection for growth, rebound in real incomes, and inflation, it is most likely that the expected recession in the US would be milder than that expected in the global peers, in the UK and Eurozone.
A section of the market is anticipating rate cuts beginning in the second half of 2023 due to US inflation nearing its peak, a sluggish housing market and low business confidence. The restoring of inflation to the 2% levels in line with Fed targets could be a 2-3 year process.
In recent times, the US has undertaken various policy initiatives to boost manufacturing competitiveness, decrease external dependence, and build supply chain resilience. These efforts have brought a focus on semiconductors, renewable energy, and electric cars, for the US to segregate portions of its cutting-edge technology ecosystem from that of China and improve its technological production capabilities. Pushing this programme would significantly increase US competitiveness, especially when combined with the potential falling US dollar.
Central bank tightening, the Ukrainian conflict, Chinese lockdowns, rising energy prices in Europe, and potential geopolitical provocations are all risks that should be kept an eye on for the US.
EU:
In 2023, Europe is predicted to have a brief recession with a negative GDP growth rate. The extent of the recession should be reduced by fiscal policy support, robust labour markets, and substantial savings, but there are negative risks due to ongoing gas supply uncertainty.
Since pricing pressures have widened and wage growth has picked up steam, headline inflation may have peaked but will likely decline only gradually going forward. Rate cuts in 2023 are improbable due to persistently high inflation and currency weakness. Given the high levels of inflation, consumer spending should drop in the upcoming quarters as household confidence declines.
Until the conflict in Ukraine is resolved, geopolitical risk will remain a problem.
Even while recent currency depreciation against the dollar softens the hit, Europe will be impacted by the anticipated downturn in global economic activity as a major exporter of products and services.
Asia:
A wider reopening in Asia could boost resilience and open doors as the US may have a recession in 2023. Even with the global recessionary trend, Asia could avoid a recession in 2023. Real GDP growth in Asia’s emerging markets is anticipated to increase in 2023, with China’s expected recovery in growth serving as the main driver.
Asia’s inflation rates appear to be at their peak and are currently far lower than those in the US and Europe. While this has also meant that policy rates have been rising across the region’s central banks, they have not increased dramatically and are almost at their peak.
A substantial investment boom and capital inflows were observed in India. Malaysia and Indonesia profited from the commodities boom. China is anticipated to experience a wider reopening in 2023; this could have favourable consequences outside of China. Reviving demand may increase Chinese imports from the wider region, reducing some of the effects of the economic downturns in Europe and the US.
India:
With an average annual growth rate of 5.5% in the past ten years, India’s economy is already the fastest growing in the world and is expected to continue this trend in 2023, outperforming other emerging market peers – Brazil, China, and Indonesia. However, there is a significant transition taking place in the global economy, involving the de-risking of supply chains. The biggest winners would be emerging markets like India. This year offers India a chance to increase its share in the world’s industrial production due to its large and growing labour force and government policy push.
Although headline inflation is expected to moderate in 2023, there are still pressure points due to food inflation’s exposure to external global variables and weather-related occurrences, as well as high and sticky core inflation.
Even in the face of significant FII selling, domestic flows kept the domestic equity markets afloat. According to projections, the significant FII selling has stress-tested Indian markets and established a floor for valuation multiples, allowing Indian markets to command greater multiples in the future based on the resilience displayed so far by domestic flows.
The capex of the combined government and private corporations in the listed sector has risen to a record level. Based on budget projections and present patterns, this is likely to increase even more in 2023. This rise in capex has been reflected through an increasing investment rate and building activity, which have fuelled the GDP recovery since 2021 and are anticipated to do so in 2023 and 2024.
Goods producers are expected to search for new export markets as the global economy weakens. India is one of the biggest markets, and its demand is generally stable, so its imports may increase further, increasing its trade imbalance. Through the promotion of exports and the signing of free trade agreements, corrective fiscal action is anticipated to be implemented to normalise trade imbalances across regions.