Macro trends that could define 2023
As we consider the year ahead, we expect to see a game of two halves, where challenging conditions will prevail in H1 before improving through H2. The aggressive pace of monetary tightening and its associated lagged effects are likely to drive a synchronized global growth downturn in the first half.
We expect global growth 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. We expect the economic slump to become more apparent in the first half of the year, with a cyclical bottom only occurring in Q2/Q3.
Our analysis shows that most advanced economies are likely to experience a recession in the year ahead. Given that the U.S. Federal Reserve (Fed) has been hiking rates at the fastest pace in decades, the U.S. economy will be facing the lingering effects of substantial policy tightening, with real rates rising while inflation eases gradually.
Economic weakness will be particularly pronounced in interest-rate-sensitive economies such as Canada, Australia, New Zealand, and the United Kingdom—these economies would almost certainly be confronting downside risks as a result of spillovers from their respective weaker housing markets. 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 (USD) will likely morph into material headwinds for growth in emerging markets (EM). In mainland China, a bumpy exit from zero-COVID policy, weak external demand, a still struggling property sector, and insufficient policy support look set to extend the country’s below-trend GDP into 2024. That said, the prospects for the rest of Asia’s economies are a little more mixed: We expect weak foreign demand to weigh on export growth, but North Asia is particularly vulnerable in light of a likely inventory overhang. On the other hand, weakness in ASEAN countries will likely be cushioned by a strong reopening bounce and relatively healthy household balance sheets.
Amid a macro backdrop characterized by elevated global inflation, uncertainty over when Fed rates might peak, and rising odds of a global recession, the first half of 2023 could bear witness to a series of sharper—and longer—bouts of market volatility. Thankfully, the picture does brighten slightly in H2, during which these headwinds are likely to moderate, ushering in more conducive conditions for financial markets.
Our base-case expectations
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 pricing 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.
While our forecast for the first half of 2023 may seem bearish, it’s always helpful to remember that periods of volatility often create opportunities. It’s also a period in which active managers can flex their skills and extract alpha. Crucially, there’s light at the end of the tunnel, as we expect trading conditions to improve in H2.
Second guessing central banks: when does a policy pivot count as a pivot?
This is another factor that 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 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 invariably involve a high degree of variability in terms of timing and magnitude. Crucially, we aren’t talking about just one central bank but different central banks, each of which operates under different constraints and challenges.
In our view, it could be helpful to think about the sequence of a policy pivot through the following framework:
Phase 1 Active tightening—Increasing pace/no slowing pace evident
Phase 2 Still tightening—Slowing pace of tightening
Phase 3 Peak policy rate—Paused
Phase 4 The pivot—When policy changes direction and rates are cut
When viewed through this framework, it’s clear to us that very few central banks are really at the point of a genuine policy pivot or ready to move from the end of the tightening cycle to the start of an easing cycle. As such, we believe the running debate for the first half of 2023 will be the pace at which central banks in phases one and two will shift into phases three and four.
A time for resilience and calm
While it might be psychologically inviting to believe that the worst of the market upheavals is over, our analysis suggests otherwise. Policy takes time to work its way through to the real economy, and there’s no reason to assume that things could be different this time. That said, experienced investors understand instinctively that market swings can bring about compelling opportunities and that sharp market movements are typically smoothed out over a longer investment horizon. The key, as always, is to remain cautious and steer clear of confirmation biases and groupthink. The way we see it, things will get better, and positive change is on the horizon, but we’re just not quite there yet.
1 Collapse and Revival: Understanding Global Recessions and Recoveries, International Monetary Fund, 2015.
This is an excerpt of Manulife Investment Management's Global Macro Outlook: the year ahead. Download the full 31-page report.
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