2022 was not an easy year.
Russia’s war on Ukraine, backed-up supply chains, a COVID resurgence and global inflation rocked the markets, sending central banks scrambling to rein inflation in with a series of interest rate hikes across the board.
Indeed, analysts are becoming more and more convinced that an international recession may be on the horizon, with the US, UK, Japan and Europe all expected to tip into recession this year.
Attempting to predict next month is difficult enough in this climate, but let’s take a look at a collection of forecasts and predictions from major financial institutions to get an idea of what we can expect in 2023.
In this article
- Is a recession on the horizon?
- What does business think?
- Economic pressure points
With global securities losing some 20% of their value in 2022, many will be hoping for, but very few expecting, a meaningful market recovery.
CommSec expects economic growth to slow to 1.1% this year, with another rate rise from the Reserve Bank of Australia expected to lift interest rates a further 25 basis points for a peak rate of 3.35%.
The Commonwealth Bank’s stockbroking firm is predicting the ASX200 could lift as much as 7% in the next 12 months – depending on inflation pressures, interest rate changes by major central banks and economic recovery in China.
“High levels of inflation, continued uncertainty about interest rates, tight labour markets, high energy prices, the war in Ukraine and the re-opening of the Chinese economy pose both risks and opportunities for investors,” CommSec chief equities economist Craig James said.
“While the coming year certainly won’t be without its challenges, we are tipping a modest gain for the benchmark S&P/ASX 200 index in 2023 of 4-7% to near 7,350-7,550 points.”
The ASX200 has indeed outperformed other markets even in this bear environment, shedding just 5.5% last year compared to the Nasdaq’s 33.1% losses, while European and Japanese bourses fell by around 13% and 9.4% respectively.
In a slightly more pessimistic outlook, Vanguard Investment Group is forecasting a peak cash rate of 4.35% by mid-2023, higher than most others are anticipating.
The investment management company reckons there’s about a 40% chance of recession in Australia, a significant improvement on the 90% odds placed on US, UK and Euro area recessions.
“Vanguard projects growth in 2023 to be very weak or slightly negative in most major economies outside of China. Unemployment numbers will likely rise but probably nowhere near as high as during the 2008 and 2020 downturns,” Vanguard senior economist Alexis Gray said.
Vanguard is quick to caution investors not to be too reactive.
“Regardless of whether Australia lands in recession territory, or whether bonds and/or equities continue to contract in 2023, reacting to current events and using short-term portfolio performance as a focal point to make investment strategy decisions can be detrimental for investors, in Vanguard’s view,” a 2023 Outlook report for the ASX read.
What does business think?
The business community has voiced concern for the new year’s prospects, with almost 70% of respondents to a recent survey stating they believe the global economy will continue to recede this year and about half anticipating that the US equity market will finish the calendar year down overall.
Those were the key takeaways from a new survey commissioned by Pitcher Partners Wealth (WA), which collected insights from heads of firms within their global network of accounts and advisory firms, Baker Tilly International, on business conditions.
Respondents cited underlying threats including higher input costs, unstable geopolitical factors and weakening economic growth for the gloomy outlook.
“The heads of each firm of Baker Tilly’s global network are as close as anyone to the pulse of business around the world, and there is concern among many about the deteriorating economic outlook,” Pitcher Partners Wealth (WA) executive director Christian Golding said.
Economic pressure points
When Pitcher Partners’ survey asked respondents to rank the top three external factors impacting business performance in their country over the next 12 months, a third nominated rising product and services inflation.
“It is well documented that many businesses are being challenged by the impact of input cost inflation,” Golding said.
“This said, the inflationary numbers released on Thursday night in the US show inflation pressures are easing along with continuing supply chain recovery, however, they remain well above the US Federal Reserve’s target.
“Unfortunately, the use of monetary policy can be a bit of a blunt instrument because while increasing rates can help temper inflation, pushing too far can put the economy into recession.
Golding believes it will be a difficult balancing act for banks to achieve inflation reduction without collateral damage to the economy.
“From an investment perspective, should the economic environment deteriorate more than expected, investors will be required to exercise caution to not be over-leveraged, and make sure the quality of assets that you are buying is high,” he said.
“Predicting a timeline for how things will play out is challenging with so many factors at play.”
The big factors in play over the next year – and the pressure points to watch – are likely to be:
- inflation and CPI increases;
- interest rates;
- tight labour markets and unemployment;
- geopolitical tensions;
- energy prices; and
- weakening economic data in China.