Could 2023 be better for investors?

Key points

• The next twelve months will likely be a testing time for the global economy, as the rebound from the pandemic fades and the cost-of-living crisis takes its toll on activity.
• A primary risk to growth is a further de-anchoring of inflation expectations. Indeed, policymakers may hike rates into restrictive territory, and throttle output in the process.
• In trying to achieve a soft landing for the global economy, policymakers’ hands are more tied than usual. Central bankers are focused on hiking rates to counter inflation, rather than cutting them. Meanwhile, governments have limited firepower available for fiscal largesse given their inflation concerns.
• After a recent surge in inflation around the globe, the good news is that price pressures are likely to ease over the next 12-18 months, whether due to statistical (base effects) or technical (fiscal subsidies) factors. 
• Global growth is anticipated to be in positive territory in 2023, at a below-trend 2.1%, as a recovery in China (3.8%) and robust expansion in India (7.4%) offsets weakness in western economies.

After a year of speedy rate hikes, rampant inflation, and slowing growth, will 2023 be any better? As businesses and consumers battle a cost-of-living squeeze of epic proportions and central bankers struggle to stay ahead of the curve, next year looks set to be another wild ride. 

With recessions looming for many advanced economies in 2023, central bankers face tough calls. That said, the global economy seems likely to eke out growth next year, as the more dynamic emerging economies ride to the rescue of the weaker prospects in advanced ones. 

Growth gripes

Policymakers find themselves in a strange place. Their usual playbook at times of economic strife points to easier monetary policy (such as interest rate cuts), in attempts to stoke demand. On this occasion, however, central bankers are focused on fighting persistent, and high, inflation. Turning to politicians, any attempts at opening up the spending taps seem unlikely, given the wariness of policymakers to undermine the inflation battle. 

Indeed, policymakers may hike rates into restrictive territory, and throttle output in the process, in the coming months. One of the primary risks to growth is a further de-anchoring of inflation expectations, a reason why the US Federal Reserve appears so set on taking aggressive measures in hiking rates. 

Peaky inflation

One of the side-effects of the pandemic has been raging inflation, as the world reopened from periods of lockdown.  While that was not a surprise, Russia’s war with Ukraine in February was. The ramifications of this act on commodity markets were to boost fuel costs and power inflation to multi-decade highs.

That said, price pressures are likely to ease over the next 12-18 months, whether due to statistical (base effects) or technical (fiscal subsidies) factors. In addition, as central banks’ rates medicine runs its course, this should moderate demand. 

While inflation may peak soon, the global consumer price index (CPI) will probably remain above the target level in many of the major regions. Barclays Investment Bank economists expect global consumer prices to leap by 7.1% in 2022, rather than last year’s 3.2% jump. Global CPI is forecast to average 4.6% in 2023, with a general easing through the year. 

Reasons to be cheerful?

Although the outlook for global growth seems to be worsening, there are many supportive factors, not least a strong labour market, healthy household and corporate balance sheets, and a service sector with scope to recover. 

As evidence builds that the worst of the inflationary surge is over — such as weaker-than-expected US consumer prices of 7.7%, year-on-year, in October¹ — the pressure may build on policymakers to take their foot off the (rate) hiking accelerator and focus on achieving a softer economic landing. 

The next twelve months will likely be testing, as the rebound from the pandemic fades and the cost-of-living crisis takes its toll on activity. Barclays Investment Bank economists forecast that advanced economies will contract by just 0.2% in 2023. Encouragingly, global growth is anticipated to be in positive territory, albeit all of 2.1%, as a recovery in China (3.8%) and robust expansion in India (7.4%) offset weakness in western economies. 

Leaving potential geopolitical shocks to one side, the growth forecasts already account for the economic effects of the known bad news, like the war in Ukraine and elevated inflationary pressures. As such, the potential for further downside from tail risks has actually reduced. 

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