Economic Outlook 2023: Trends to Watch

1. Oveview

Investors should brace for another turbulent year in financial markets, economists warned, as central banks battle inflation, China reopens its economy after Covid-19 restrictions and the war in Ukraine pushes the global economy into recession.
The first half of the new year could be uneven, according to Wall Street forecasts, after global markets last year suffered their steepest losses since the 2008 financial crisis.
However, the US S&P 500 is still on track to finish 2023 slightly above where it started the year. The average target of 22 strategists surveyed by Bloomberg is for the S&P 500 to reach 4,078 by the end of 2023, about 6% higher than by the end of 2022.
Economists predict that the Federal Reserve will slow down its pace of rate hikes this year due to the gloomy outlook for the U.S. economy. U.S. inflation has eased from its peak last summer, and a series of rate hikes by the Federal Reserve in 2022 has also cooled the housing market.

2. According to expert opinion

“A period of countertrend growth is inevitable and the risk of a recession is high as the lagged effects of tightening monetary policy feed through the economy,” said Brian Ross, senior U.S. economist at UBS Global Wealth Management.
Michael Antonelli, managing director and market strategist at investment bank Baird, predicts the Fed will “hit the pause button” after it ends its rate-hike cycle in February and hikes again. He also expects U.S. stocks to rise in 2023, noting that two consecutive declines are “very rare.”
“The question for the stock market is, ‘Is it getting better or is it getting worse?’ I think next year will be a little bit better,” Antonelli told Yahoo Finance Live.
“I don’t think we’re going to see a big gain, but I think next year will be more or less positive,” Antonelli added.
Deutsche Bank predicts a recession this year will hit financial markets.
Deutsche Bank analysts said in their World Outlook 2023 late last year that “when the US recession hit, major equity markets plunged 25% from levels slightly above today’s levels, but will fully recover assuming the recession lasts only a few quarters.” By the end of 2023,” said. year.
Strategists at Russell Investments expect the global economy to recover by the end of the year, though a recession is likely in 2023 and stocks could struggle.
The head of the International Monetary Fund (IMF) has warned that this year will be “harder than the past few years” with a third of the world’s economy in recession. “This is because all three economies are slowing down at the same time: the US, the EU and China,” said Kristalina Georgieva.
A global recession could prompt central banks to reverse the massive rate hikes enacted last year. Central banks will ease monetary policy as early as the second half of 2023, according to Nikolaj Schmidt, chief international economist at investment manager T. Rowe Price.
“We see the world slipping into a global recession in 2023. The recession will be the result of the massive monetary tightening that central banks have implemented over the past 12 months. As a silver lining, it will sow the seeds of a real pullback in inflation,” said Smith Special said.
Analysts at investment bank Jefferies expect a global recession this year, but expect Asia to avoid a full-blown recession. The region could benefit from a revival in tourism as Chinese tourists slowly start to return.
“Global economic conditions continue to deteriorate with high inflation and tight market conditions. Asia, however, can emerge from the worst and avoid a full-blown recession. Asia bounced back quickly and we expect the same in 2023,” said an analyst at Jefferies.
China’s decision to ease COVID-19 restrictions last month may ease tensions in global supply chains, but could also lead to higher demand for raw materials and energy, fueling inflationary pressures.
The U.S. economy could slow further and enter a mild recession in 2023.
We expect the U.S. economy to grow at a low rate of 0.5-1% in real GDP in 2023, which includes our forecast of a mild recession starting later in 2023. This will further slow growth of 1.5-2%. 6% in 2022, 6% in 2021, and a long-term average annual growth rate of 1.8%.
Taking into account the major components of GDP, real consumer spending is expected to grow by around 2% in 2023, which would lead to wage growth of 4% to 5%, inflation to moderate to 3% to 4%, and a further reduction in the cumulative effects of the pandemic. saving. Assuming government spending of 17-18% of GDP should be a neutral contributor in 2023, increases in infrastructure and CHIPS and science law-related spending are offset by lower pandemic-related spending. Business investment is forecast to grow 3% through 2023, with some declines due to strong spending on equipment and technology.
It will reduce spending on buildings, factories and structures. Through 2023, we expect residential investment (housing) to remain bearish in a high interest rate environment. That equates to about 5% of GDP and could fall by about 10% in 2022 and then 10-12% in 2023. Net foreign trade is projected to decline by 1% of GDP in 2023.

3. Fed’s rate?

The Fed’s rate hike cycle is coming to an end. The proportion of terminal funds is expected to reach 5%
The Fed is now tightening monetary policy faster than ever and believes it will raise rates another 100 basis points before pausing next spring. This includes forecasts for a 50 basis point rate hike at the December meeting and a further 25 basis points in February and March 2023. Assuming we are correct, we increase cumulative tightening to 475 basis points and set a year-end federal funds target range of 4.75% to 5.00%.
In our view, the funds rate is likely to remain at this constrained level until 2023 or until there is solid evidence that inflation is returning to the 2% target. Wage inflation will likely need some easing in the labor market to slow to a more comfortable 3.5% from the current 5%. If that happens, the Fed could ease policy rates to a more neutral level in 2024.
The Fed’s balance sheet contraction, or quantitative tightening, is also underway, and we expect the current outflow rate of $95 billion per month ($60 billion in Treasuries and $35 billion in mortgage-backed securities) to continue through 2023. The economy slowed as private investors absorbed assets on the Fed’s balance sheet.
The rising interest rate environment has so far been most pronounced in a slowing housing market and a stronger dollar, but the cumulative effect of higher borrowing costs and tighter fiscal conditions is expected to dampen demand across the broader economy through 2023.

Consumers enter 2023 on solid financial footing, but with a smaller buffer than in 2022.
Household balance sheets still look healthy by historical standards, although a significant portion of the excess savings and liquidity accumulated in 2020-21 has been depleted in 2022. Clear consumers indulged in savings accumulated during the pandemic and bought more with their credit cards. The excess savings accumulated during the pandemic ranged from $2.2 trillion to $2.4 trillion and is currently estimated at $1.2 trillion to $1.8 trillion. Depending on the path of inflation and the pace of consumer spending in the coming quarters, these excess savings could be fully depleted by mid-to-late 2023.
Credit card balances have grown rapidly over the past six months, up 15% year-over-year through the end of the third quarter, the largest increase in 20 years. However, despite the surge in backlogs, absolute levels have returned to Q4 2019 levels and delinquency rates remain historically low.
If you look at consumer loans like mortgages, auto loans, home equity, credit cards and student loans, the overall level is up $2.4 trillion from the end of 2019. About 90% of this increase was mortgage debt. Other pandemic dynamics drive significant housing activity from mid-2020 to early 2022. Importantly, 65-70% of mortgages incurred in the past two years had a credit score of 760 or higher, and only 2% had a credit score of less than 760. 620 – very different from the years before the 2008 subprime mortgage crisis. Higher auto and student loans accounted for the remainder of post-2019 consumer loan growth, while home equity loans remained below pre-pandemic levels.
Despite record highs in consumer borrowing, the aggregate delinquency rate held steady at 2.7% for the sixth straight quarter, near record lows, after falling sharply early in the pandemic. Despite the increase in the cost of debt, overall debt service ratios remain below pre-pandemic norms and are well below levels seen before the 2008 financial crisis.

4. Conclusion

Headwinds blow to manufacturing. still benefit from standardized services
Overall, we think real consumption will grow by 1-2% next year. Spending on services is likely to outpace spending on goods, which are typically more sensitive to changes in interest rates and a stronger dollar. Furthermore, given that commodity consumption continues to outperform the pre-pandemic baseline, further regressions still appear warranted.
After the pandemic began, consumers allocated more spending to commodities, especially durable goods. Goods increased from 31% to 36% of consumer spending in 2020-21, while services accounted for 69%. reduced to 64%. This part goes back to 2022 and we see more.

Economic Outlook 2023: Trends to Watch

1. Oveview

Investors should brace for another turbulent year in financial markets, economists warned, as central banks battle inflation, China reopens its economy after Covid-19 restrictions and the war in Ukraine pushes the global economy into recession.
The first half of the new year could be uneven, according to Wall Street forecasts, after global markets last year suffered their steepest losses since the 2008 financial crisis.
However, the US S&P 500 is still on track to finish 2023 slightly above where it started the year. The average target of 22 strategists surveyed by Bloomberg is for the S&P 500 to reach 4,078 by the end of 2023, about 6% higher than by the end of 2022.
Economists predict that the Federal Reserve will slow down its pace of rate hikes this year due to the gloomy outlook for the U.S. economy. U.S. inflation has eased from its peak last summer, and a series of rate hikes by the Federal Reserve in 2022 has also cooled the housing market.

2. According to expert opinion

“A period of countertrend growth is inevitable and the risk of a recession is high as the lagged effects of tightening monetary policy feed through the economy,” said Brian Ross, senior U.S. economist at UBS Global Wealth Management.
Michael Antonelli, managing director and market strategist at investment bank Baird, predicts the Fed will “hit the pause button” after it ends its rate-hike cycle in February and hikes again. He also expects U.S. stocks to rise in 2023, noting that two consecutive declines are “very rare.”
“The question for the stock market is, ‘Is it getting better or is it getting worse?’ I think next year will be a little bit better,” Antonelli told Yahoo Finance Live.
“I don’t think we’re going to see a big gain, but I think next year will be more or less positive,” Antonelli added.
Deutsche Bank predicts a recession this year will hit financial markets.
Deutsche Bank analysts said in their World Outlook 2023 late last year that “when the US recession hit, major equity markets plunged 25% from levels slightly above today’s levels, but will fully recover assuming the recession lasts only a few quarters.” By the end of 2023,” said. year.
Strategists at Russell Investments expect the global economy to recover by the end of the year, though a recession is likely in 2023 and stocks could struggle.
The head of the International Monetary Fund (IMF) has warned that this year will be “harder than the past few years” with a third of the world’s economy in recession. “This is because all three economies are slowing down at the same time: the US, the EU and China,” said Kristalina Georgieva.
A global recession could prompt central banks to reverse the massive rate hikes enacted last year. Central banks will ease monetary policy as early as the second half of 2023, according to Nikolaj Schmidt, chief international economist at investment manager T. Rowe Price.
“We see the world slipping into a global recession in 2023. The recession will be the result of the massive monetary tightening that central banks have implemented over the past 12 months. As a silver lining, it will sow the seeds of a real pullback in inflation,” said Smith Special said.
Analysts at investment bank Jefferies expect a global recession this year, but expect Asia to avoid a full-blown recession. The region could benefit from a revival in tourism as Chinese tourists slowly start to return.
“Global economic conditions continue to deteriorate with high inflation and tight market conditions. Asia, however, can emerge from the worst and avoid a full-blown recession. Asia bounced back quickly and we expect the same in 2023,” said an analyst at Jefferies.
China’s decision to ease COVID-19 restrictions last month may ease tensions in global supply chains, but could also lead to higher demand for raw materials and energy, fueling inflationary pressures.
The U.S. economy could slow further and enter a mild recession in 2023.
We expect the U.S. economy to grow at a low rate of 0.5-1% in real GDP in 2023, which includes our forecast of a mild recession starting later in 2023. This will further slow growth of 1.5-2%. 6% in 2022, 6% in 2021, and a long-term average annual growth rate of 1.8%.
Taking into account the major components of GDP, real consumer spending is expected to grow by around 2% in 2023, which would lead to wage growth of 4% to 5%, inflation to moderate to 3% to 4%, and a further reduction in the cumulative effects of the pandemic. saving. Assuming government spending of 17-18% of GDP should be a neutral contributor in 2023, increases in infrastructure and CHIPS and science law-related spending are offset by lower pandemic-related spending. Business investment is forecast to grow 3% through 2023, with some declines due to strong spending on equipment and technology.
It will reduce spending on buildings, factories and structures. Through 2023, we expect residential investment (housing) to remain bearish in a high interest rate environment. That equates to about 5% of GDP and could fall by about 10% in 2022 and then 10-12% in 2023. Net foreign trade is projected to decline by 1% of GDP in 2023.

3. Fed’s rate?

The Fed’s rate hike cycle is coming to an end. The proportion of terminal funds is expected to reach 5%
The Fed is now tightening monetary policy faster than ever and believes it will raise rates another 100 basis points before pausing next spring. This includes forecasts for a 50 basis point rate hike at the December meeting and a further 25 basis points in February and March 2023. Assuming we are correct, we increase cumulative tightening to 475 basis points and set a year-end federal funds target range of 4.75% to 5.00%.
In our view, the funds rate is likely to remain at this constrained level until 2023 or until there is solid evidence that inflation is returning to the 2% target. Wage inflation will likely need some easing in the labor market to slow to a more comfortable 3.5% from the current 5%. If that happens, the Fed could ease policy rates to a more neutral level in 2024.
The Fed’s balance sheet contraction, or quantitative tightening, is also underway, and we expect the current outflow rate of $95 billion per month ($60 billion in Treasuries and $35 billion in mortgage-backed securities) to continue through 2023. The economy slowed as private investors absorbed assets on the Fed’s balance sheet.
The rising interest rate environment has so far been most pronounced in a slowing housing market and a stronger dollar, but the cumulative effect of higher borrowing costs and tighter fiscal conditions is expected to dampen demand across the broader economy through 2023.

Consumers enter 2023 on solid financial footing, but with a smaller buffer than in 2022.
Household balance sheets still look healthy by historical standards, although a significant portion of the excess savings and liquidity accumulated in 2020-21 has been depleted in 2022. Clear consumers indulged in savings accumulated during the pandemic and bought more with their credit cards. The excess savings accumulated during the pandemic ranged from $2.2 trillion to $2.4 trillion and is currently estimated at $1.2 trillion to $1.8 trillion. Depending on the path of inflation and the pace of consumer spending in the coming quarters, these excess savings could be fully depleted by mid-to-late 2023.
Credit card balances have grown rapidly over the past six months, up 15% year-over-year through the end of the third quarter, the largest increase in 20 years. However, despite the surge in backlogs, absolute levels have returned to Q4 2019 levels and delinquency rates remain historically low.
If you look at consumer loans like mortgages, auto loans, home equity, credit cards and student loans, the overall level is up $2.4 trillion from the end of 2019. About 90% of this increase was mortgage debt. Other pandemic dynamics drive significant housing activity from mid-2020 to early 2022. Importantly, 65-70% of mortgages incurred in the past two years had a credit score of 760 or higher, and only 2% had a credit score of less than 760. 620 – very different from the years before the 2008 subprime mortgage crisis. Higher auto and student loans accounted for the remainder of post-2019 consumer loan growth, while home equity loans remained below pre-pandemic levels.
Despite record highs in consumer borrowing, the aggregate delinquency rate held steady at 2.7% for the sixth straight quarter, near record lows, after falling sharply early in the pandemic. Despite the increase in the cost of debt, overall debt service ratios remain below pre-pandemic norms and are well below levels seen before the 2008 financial crisis.

4. Conclusion

Headwinds blow to manufacturing. still benefit from standardized services
Overall, we think real consumption will grow by 1-2% next year. Spending on services is likely to outpace spending on goods, which are typically more sensitive to changes in interest rates and a stronger dollar. Furthermore, given that commodity consumption continues to outperform the pre-pandemic baseline, further regressions still appear warranted.
After the pandemic began, consumers allocated more spending to commodities, especially durable goods. Goods increased from 31% to 36% of consumer spending in 2020-21, while services accounted for 69%. reduced to 64%. This part goes back to 2022 and we see more.