2023 Q1 Global Macro Outlook—The Year Ahead
Persistent stagflationary dynamics, continued geopolitical upheavals, and an aggressive Fed. As we consider the year ahead, we expect to see a game of two halves, where challenging conditions are likely to prevail in H1 before improving through H2. We examine macro trends that could define 2023.
Global growth outlook: what will 2023 bring?
Global growth seems set to slow materially and come in substantially lower than the below 3% threshold that the International Monetary Fund uses to define global recessions.1 A downturn of this magnitude—excluding the COVID-19 shock and the global financial crisis—could make 2023 the worst year for global growth since the 1980s.
Our analysis suggests that most advanced economies will slip into recession in 2023: The United States will face the lagged impact of the U.S. Federal Reserve's (Fed's) aggressive tightening. Economic weakness will be particularly pronounced in interest-rate-sensitive economies such as Canada, Australia, New Zealand, and the United Kingdom. In Continental Europe, the growth drag will predominantly stem from particularly large negative terms-of-trade shocks. Meanwhile, slowing final demand from advanced economies, elevated inflation, and a still-strong U.S. dollar are likely to morph into material headwinds for emerging markets. And in Mainland China, a bumpy exit from zero-COVID policy, weak external demand, a still struggling property sector, and insufficient policy support could well extend the country’s below-trend GDP into 2024.
Thankfully, our analysis suggests that the growth picture will brighten slightly in H2, during which these headwinds are likely to moderate, ushering in more conducive conditions for financial markets.
2023 global growth outlook
Our base case is that the looming negative demand shock is sufficient to see growth concerns overtake fears about the inflationary backdrop, a development that could pave the path to a dovish policy pivot among central banks, leading to monetary easing in Q4. This is consistent with current market pricing¹ and the historical tendency over the past five decades, where rapid and substantial rate hikes have tightened financial conditions so quickly that the subsequent growth slowdown prompted a sharp turnaround in the Fed cycle from tightening to easing.
Risks to our assumption 1 - Prices likely to remain elevated
The impact that monetary policy has on the real economy typically isn’t easily observable until 12 to 18 months later. We’re wary that the transmission of the current global tightening cycle has barely begun; historically, the slowdown in growth becomes manifest once the tightening cycle has ended. Looking back to the year just past, global financial conditions only moved into restrictive territory in March 2022, a threshold that the United States crossed six months later.
Risks to our assumption 2 - Mainland China's COVID-19 controls
We maintain our view that the path to reopening will gain further momentum after the National Party Congress in March 2023. The recent call for a whole society push to encourage the elderly to get vaccinated is an important shift, although it remains to be seen whether persuasion alone will increase vaccine take-up or if the rollout will proceed as quickly as planned.
Risks to our assumption 3 - USD strength: too early to call a peak
A weaker U.S. dollar (USD) is typically associated with an improved global growth outlook and a risk-on environment for risk markets; the converse is also true. Sustained USD depreciation would require global economic growth outside of the United States to outstrip U.S. growth and for interest-rate differentials between the United States and the rest of the world to narrow; however, neither dynamic appears likely for the time being.
Defining central bank policy pivots
This is another factor we think investors should take into consideration: How should we define pivots? In recent weeks, market attention has shifted to forecasting the peak in the global rate-tightening cycle with many references to central bank policy pivots. These four words, from what we can see, have become the phrase du jour to describe just about any shift in monetary policy.
Such characterization, however, doesn’t adequately capture the nuance in interest-rate cycles, as these pivots involve a high degree of variability in terms of timing and magnitude. Crucially, we aren’t talking about just one central bank but many central banks, each of which operates under different constraints and challenges.
Monetary policy: transitioning from tightening to easing
Source: Manulife Investment Management, as of December 16, 2022. The Reserve Bank of Australia straddles phases one, two, and three: Despite announcing smaller interest-rate cuts recently, minutes and statements from the central bank suggest it wants to maintain optionality for larger hikes in the future.
1 As of December 13, 2022.
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