2023 forecasts by the Street
JPM, Wells Fargo, ING, Saxo and LGIM reports for 2023
2023 is one year with the widest range of possible outcomes, so it is important to keep the mind open and take into account more than one view.
Here we report summaries of some 2023 forecasts by relevant analysts.
Global 2023 Year-Ahead Outlook from the J.P. Morgan Research
As we approach 2023, we see a growing recession risk. In fact, our view is that market and economic weakness may occur in 2023 as a result of central bank overtightening, with Europe first and the US to follow later next year. Additionally, we think that central banks are likely to induce market turmoil and subsequently be forced to reverse their course. We expect that the lows we’ve seen this year in equity markets will likely be re-tested in the S&P 500 early next year, and we see an ongoing trend of pullback in risk assets, and a rise in allocation to bonds.
Our view is that central banks will likely signal interest rate cuts sometime next year, which will result in a sustained recovery of asset prices by the end of 2023, and subsequently the economy. DM monetary policy next year will likely monitor the impact of financial tightening, and the evolution of the labour market and its implications on the near- to medium-term inflation outlook. However, for that pivot to take place, we will first need to see some combination of economic deterioration, an increase in unemployment, market volatility, decline in levels of risky assets, and decline in inflation. All of these are likely to cause or coincide with downside risk in the near term, with the continued low positioning in risk assets potentially acting as a mitigating factor. Then, at some point in the second half of 2023, markets will likely turn their focus towards the better economic prospects and corporate fundamentals later in 2024, and trade at levels higher than now.
The pandemic and the associated macroeconomic policy response imparted some outsized imbalances to many economies. How households, businesses and policymakers respond to the trade-offs that they face will collectively determine economic performance in 2023.
Surging demand in conjunction with constrained supply has caused inflation in the United States to shoot up to its highest rate in decades. The Federal Reserve now faces an unpleasant dilemma: the FOMC needs to raise rates further to ensure that inflation recedes back toward target, but excessive tightening could lead to recession. We believe the FOMC will err on the side of bringing down inflation at the expense of a U.S. economic downturn in 2023.
Inflation has eroded real personal income in the United States. Yet American households have been able to maintain solid growth in spending by bringing down saving rates and incurring more credit card debt. Admittedly, these trends could potentially continue in 2023, but we look for consumer spending to begin a period of retrenchment.
Some households must decide whether to buy a house, which has become less affordable due to surging mortgage rates and the skyrocketing of home prices since the pandemic began, or to rent, the cost of which has also shot up significantly. Their decisions regarding where to live will help to determine the economic outlook in many regions of the country.
Businesses have struggled over the past few years to find qualified workers, and they are understandably reluctant to displace them. But we look for many firms to eventually reduce capex and cut payrolls to protect margins squeezed by elevated labour costs and flagging demand.
Central banks in many foreign economies face the same dilemma as the Federal Reserve. That is, they too need to bring down inflation from multi-decade highs, but excessive tightening could lead to recession. Like their counterparts at the Fed, we look for foreign central bankers to choose inflation reduction. Consequently, we forecast that many foreign economies will be in recession in 2023.
The US dollar has strengthened vis-á-vis most foreign currencies in 2022, and we look for this trend to continue early next year. But as market participants begin to anticipate eventual policy easing in the United States, we believe the greenback will start to trend lower beginning in mid-2023.
“May he live in interesting times”
Different shades of recession
What will 2023 bring? A natural reflex of many forecasters is to simply extrapolate recent trends and developments into the new year. And, indeed, many of this year's issues will also be prominent in the next: war, the energy crisis, inflation, trade tensions and even Covid are likely to affect the global economy significantly. This is not the moment to identify potential new black or grey swans... nor even pink ones. Our predictions and calls for 2023 reflect our base case: median forecasts backed by this year’s events and assumptions.
We expect to see several different shades of recession in 2023. We should get a rather textbook-style recession in the US with the central bank hiking rates until the real estate and labour markets start to weaken, inflation comes down, and the Fed can actually cut policy rates again. Expect a recession that feels but doesn’t read like a recession in China with Covid restrictions, a deflating real estate market and weakening global demand, bringing down economic activity to almost unprecedented low levels. And finally, look forward to an end to the typical cycle in the eurozone, where a mild recession will be followed by only very subdued growth, with a risk of a 'double dip', as the region has to shoulder many structural challenges and transitions. These transitions will first weigh on growth before, if successfully mastered, they can increase the bloc’s potential and actually add to growth again.
The widest range of possible outcomes and forecasts
Inflation will continue to be one of the key themes of 2023. We expect it to come down quickly in America, given the very special characteristics of the US inflation basket, allowing the Fed to stop rate hikes and eventually even cut before the end of the year. In the eurozone, inflation could turn out to be stickier than the European Central Bank would like and also perhaps afford. Still, with interest rates entering restrictive territory in early 2023, the looming loss of economic wealth and a large need for investment, the bank will be forced to stop earlier than it perhaps might like. Or, alternatively, it could commit a policy mistake if it hikes rates far beyond mildly restrictive levels.
Saxo’s ten Outrageous Predictions 2023
The theme revolves around a War Economy, not just in military terms, but in economic, political, and social terms as well. Gone are the days when low interest rates could foster dreams of a harmonious world built on renewable energy, equality, and independent central banks. In 2023, world economies will shift into war economy mode, where sovereign economic gains and self-reliance trump globalisation. Some of the calls include Gold rocketing to US$ 3000, the UK holding an UnBrexit referendum, or even a new reserve currency to replace the dollar.
Remember, it’s not about being right. The predictions focus on a series of unlikely but underappreciated events which, if they were to occur, could send shockwaves across financial markets.
Billionaire coalition creates trillion-dollar Manhattan Project for energy
The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resigns
The political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandate
As markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full union
With continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030
In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendum
Following a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflation
History tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve asset
Sanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial system
Following the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equity
With the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.
When might the clouds dissipate?
This past year has been one of the worst periods on record for investors. We assess what could signal a turnaround in 2023.
With much of the world economy sliding into recession, and higher rates continuing to bear down on relative valuation levels, we believe investors should gird themselves for returns that are subdued at best. We also expect market volatility to remain heightened. Within this grim context, the most pressing questions are: How bad might things get? And what could signal a turnaround? In this outlook, teams from across LGIM offer answers for a variety of investment capabilities and asset classes.
We suggest that:
Equities may reach new lows, before recovering later in 2023 as inflation is tamed
In the US, we expect recession to begin in the spring, with output falling through the rest of the year. In Europe and the UK, real incomes are being squeezed by a severe energy price shock. The recession in these regions has already begun, in our view, and is likely to prove deeper and longer-lasting than consensus expects. Furthermore, market pressure has forced the UK government to deliver a tighter fiscal policy than would otherwise have been necessary.
Moreover, we expect equities to bottom before the recession ends. Late recession and early recovery phases of the cycle are typically the best time to invest. In our view, that will only come when visibility on the economic trough improves, setting up a switch to a much healthier environment for risk assets – possibly towards the back end of the year.
Bond investors can now access income of which they could only recently dream
We believe a potentially better option for income appears to be corporate investment grade (IG) credit, despite the outlook for economic growth and company earnings. In euro and sterling IG credit markets, spreads already seem to be compensating investors for recession risk and, therefore, could provide a large cushion to absorb bad news.
While it is reasonable to expect credit spreads to widen from today’s levels as recession becomes more imminent, we believe the interplay between government debt and corporate bonds should help make IG credit appealing from an income perspective next year. As government bond yields fall, credit spreads will likely widen, but the overall all-in-yield should stay steady, in our view, providing the sort of income of which investors have been starved for more than a decade.
Pandemic-era developments should bolster IG and HY bonds in a downturn
This view reflects our proximity to the pandemic in 2020, in which there were a historically high number of fallen angels – bonds that have lost their investment grade (IG) status. The sudden shock to profitability and cash flows caused by worldwide lockdowns led to downgrades of many of the weaker BBB names, meaning that they have already exited IG indices. The companies that remain IG have proven they have business models that can withstand a severe shock.
On average, credit quality has been improving across both IG and high yield (HY) since 2021 as companies have felt the benefits of the more prudent financial policies adopted in 2020, and as profitability fully recovered. We think that a recession in 2023 will likely stymie this recovery, and lead to a small net deterioration in credit quality, but nowhere close to the levels witnessed due to COVID-19.
Further growth is likely in clean energy, cyber security and photonics
Europe’s energy crisis was triggered by Russia’s invasion of Ukraine, but the fragility of our energy network is a result of years of underinvestment into renewables. The climate crisis, meanwhile, hasn’t gone away simply because gas supplies have been squeezed.
Renewables – primarily wind, solar and hydroelectric – hold the key to solving these intertwined problems. Today, only around a quarter of global electricity supply comes from renewables, while renewables’ share of the global energy mix, which includes transport and heating, is only 11%.
Liquidity in real estate equity and private credit may have overshadowed some important opportunities
Data from the Royal Institute of Chartered Surveyors (RICS) indicate that demand for space, particularly in the retail and office sectors, has begun to weaken. While there is some slowdown in industrial sector demand, we remain positive on the long-term structural demand for industrial space in urban locations.
Within European infrastructure, Russia’s invasion of Ukraine has put into sharper focus the need for renewables to meet both climate and energy security goals; the EU is targeting a renewable share of 45% by 2030. By way of illustration, annual additions of solar capacity will need to double compared to the last three years to deliver the EU’s 2030 ambitions.
Government intervention to cap power prices, and rising capex costs, have undoubtedly posed near-term headwinds for investors. But we believe the reliance on private capital, and the urgent need for the assets, create a powerful incentive for policymakers to ensure that investors are provided with an appropriate return on capital.
Thank you, great round! Keep it rocking!