Investment Outlook 2023 – a fundamental reset
In hindsight, 2022 marks the year when geopolitics took center stage, not only significantly impacting the global economy and financial markets, but resetting international relations and global international commerce.
This has implications for short-, medium-, and long-term growth, price prospects, and monetary and fiscal policy, potentially leading to sizeable shifts in the global monetary system with reverberations in financial markets.
In our Investment Outlook 2023, we present an investment road map of what investors may expect with regard to the economy and the financial markets.
Out with the old monetary regime
The year 2022 marked the end of "lowflation," a side effect of globalization. Indeed, COVID-related disruptions of global supply chains, more decisive climate policy action as well as a full-fledged energy crisis and a food price shock in the wake of the Ukraine war led to a new regime of elevated inflation.
Not only did volatile energy and food prices drive up headline inflation, but wage increases also allowed less volatile price categories like travel, hospitality, and medical services to rise, lifting core inflation to multi-decade highs.
Although we believe inflation has peaked in most countries as a result of decisive monetary policy action, central banks are signaling that they need to hike rates further to reduce demand and create slack in labor markets.
Although we expect the pace of tightening to peak by the end of 2022, we do not forecast any developed market central banks to cut interest rates in 2023.
Growth outlook dims
More monetary tightening, rising real yields, energy price shocks in Europe, China's ongoing property market downturn, and COVID-19 lockdowns have led us to cut our forecasts for GDP growth across the board. We now expect the euro zone and the UK to have entered a recession in Q4 2022, and China to be in a growth recession. These economies should bottom out by mid-2023 and begin a weak, tentative recovery – a scenario that rests on the crucial assumption that the United States manages to avoid a recession.
The geopolitical events of 2022 have increased the risk that climate action may be uncoordinated across regions and even possibly postponed, making it less effective. In a disorderly climate transition, the negative supply shock will ultimately be larger, leading to higher inflation and lower growth in the medium term, accompanied by bouts of volatility as climate policy arbitrarily evolves across regions. This amplifies our expectations of a new macro regime with elevated inflation and lower potential growth.