WhoshouldIsee Tracks

Market Outlook 2023

Introduction

2023 may well be one of the slowest years for global growth in decades. Analysts expect the world to grow at 1.7% this year, a big slowdown from the 6%+ growth of 2021 and a significant drop from the 3.2% growth for 2022. Inflation will likely fall slowly, with consumer prices worldwide rising at a 4.6% average this year. (Citi Global Wealth)

Advanced economies are heading into a recession, led by the euro area and the UK. The US will also likely contract across 2023, as the lagged effects of a super-fast hiking cycle finally hit the economy. Analysts forecast below-consensus 3.8% growth in China, given a slow move away from zero-COVID policies and a sluggish property sector, though they note that some recent initiatives are encouraging. India looks like a rare bright spot, but the economy is not large enough to change the overall global growth outlook.

Regional breakdown

UK

It looks like 11.1% in October marked the UK’s inflation peak, though we’re unlikely to see the headline rate drop out of double digits until the spring. There are compelling reasons to expect inflation to fall thereafter, especially for durable goods, where Covid-19 price pressures are cooling rapidly on lower commodity and shipping prices, weaker consumer demand and rising inventory. 

With wage growth likely to prove a little stickier in the face of ongoing skill shortages, services inflation is expected to slow more gradually. We think inflation will end the year around 4% before heading more-or-less back to target in 2024.

UK equities benefited significantly from the
GBP’s depreciation in 2022, given that UK equities earn most of their revenue from international markets. Looking forward, the UK is still trading at a meaningfully attractive valuation level and has one of the highest dividend yields within developed markets. However, a lot of these advantages are offset by negative earnings growth forecasts for the
next two years. 

(2023 Economic and Capital Markets Outlook – Apollo)

Europe

Amid geopolitical tensions, energy security will continue to dominate government agendas in 2023. Given the level and volatility of fossil fuel prices and the competitiveness of cheap renewable energy sources, it is unlikely that the European Union will ever depend on external supplies to the same extent that it did prior to the Ukraine war, when it imported 90% of its gas.

The search for a more secure energy system – in Europe and elsewhere in the world – entails a combination of measures, though it is to be expected that renewables will be the biggest beneficiary.

(CIO Insights – Deutsche Bank)

USA

Solid earnings picture, but relatively elevated valuation US equities saw a sharp de-rating in 2022 as the Fed increased its policy rate significantly. In particular, the technology sector, which the USA has substantial exposure to, came under strong pressure in 2022. However, while the US equity market offers a relatively stable earnings picture, it still trades at a premium to the rest of the world. 

Growth is expected to slow, but the economic outlook is still better than for Europe as the USA is less dependent on energy imports.

2023 will likely be a year of two very different halves for US equities. As long as the Fed keeps its restrictive stance and yields remain elevated, US equities will show a rather muted performance. Once markets start pricing in a less hawkish Fed, it’s believe US equities have scope to recover.

(CIO Insights – Deutsche Bank)

Asia

India, Indonesia and China – three of the four most populous economies on earth with more than three billion inhabitants in total – could each see GDP grow by 5-6% in 2023. The developed economies of South Korea and Japan may also grow more rapidly than those of most other developed markets.

Asian economies are expected to largely reopen by no later than spring 2023. The Chinese government’s fiscal measures, which have been restrained so far, could then have their full impact, for example, in the areas of digital transformation, infrastructure, transport, renewables and biotech. This would be advantageous for China’s trading partners in Asia, too. Accumulated private savings in China may be spent on holiday travel, and popular destinations such as Thailand, Malaysia and the Philippines would profit from this.

The risks to growth in Asia in 2023 emanate primarily from increasing geopolitical tensions, especially in the Pacific, a potential reigniting of the Chinese real estate crisis, and from delays in rolling back the strict Covid-19 containment measures in China.

(Global economic outlook 2023 – ING)

Closing Thoughts

It’s now expected that there will be a cumulative hit to GDP of 1.7%, with a trough this summer. Both hospitality and retail are being impacted as consumers rein in spending, and less generous energy support this year points to further weakness in these areas. History also offers clues; in the 1990s and 2008 recessions, construction and (in the latter case) manufacturing took a fair share of the hit, and there are some parallels this time. A weaker housing market and high interest rates pose an issue for the former sector, while falling new orders, high inventory and elevated energy costs are a constraint on the latter.

With a recession looming, it’s hard to see how the jobs market can stay this tight. An unemployment rate of 3.5% looks like a trough. Equally, worker shortages are proving much more persistent than expected and so far, there are few signs of glaring weakness other than a modest reduction in vacancy numbers.

Those shortages are partly linked to higher rates of long-term sickness, which has drawn workers out of predominantly lower-paid consumer service roles. The UK is unique in seeing rates of inactive workers increase – most countries have seen a resumed downtrend post-Covid. This is partly linked to healthcare delays – and waiting lists are expected to continue growing – so we expect this trend to continue. Reduced numbers of EU workers in the UK labour market have also amplified shortages, albeit non-EU employment has increased dramatically. So, while we expect the unemployment rate to drift higher – we suspect towards the 4.5% area this year – there is a stronger incentive than usual for firms to “hoard” labour.

To see how Chapman Consulting can help make your business recession proof, please contact us using the link below.

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