What Lies Ahead For Global Markets in 2023

The year has started off well, but the global economy continues to face several challenges. From persistently high inflation and aggressive global policy tightening (led by the USA Federal Reserve) to the continued fallout of the Russia-Ukraine war and the energy crisis, weak consumer confidence and political disruptions.

The US and Dollar Strength

In 2022, the strong dollar has proved to be a wrecking ball for other economies, an even stronger dollar could accelerate the onset of recession elsewhere, but a weakening Dollar, could bring broad relief.

Emerging markets are especially sensitive to changes in the Dollar and US companies are not immune to these headwinds as a stronger Dollar means their offshore revenues begin to shrink. The S&P 500’s foreign exposure is around 30%.

In the US, the Fed appears set on raising rates significantly beyond neutral levels to bring inflation under control. January inflation came in higher than expectations at 6.4%, affirming concerns that it may not come down as swiftly as is hoped. The housing market is already showing signs of stress, as higher mortgage rates and reduced affordability stifle transactions. However, inflation and the labor market are still strong, compelling the Fed to keep going.

Europe and UK

Europe’s year will be decided by the direction of energy prices, interest rates, and the weather. The milder than expected winter has meant that they have avoided the blackouts that were predicted late last year. A recession is expected, as the European Central Bank continues with rate rises at a time when households are already suffering from the surge in the cost of living.

January UK inflation eased to 10.1% y/y, largely due to falling energy prices. The Bank of England indicated more hikes are likely into 2023 in its bid to curb inflation. The Office for Budget Responsibility (OBR) estimated that the U.K. economy was already in recession and that GDP will contract by 1.4% in 2023.

The new Prime Minister Rishi Sunak’s sweeping new budget plan was greeted more favorably than Liz Truss’s disastrous September mini budget, proposing higher taxes and lower spending in an effort to reduce the government’s substantial debt levels.

UK Inflation since 1989 to Nov 2022

China too has taken a different pathway in 2022, thanks to its zero-Covid policy and the reining in of its property market. In the next 12 months, we expect policymakers to continue to focus on reviving the economy, investing in longer-term areas such as green technologies and infrastructure and thanks to the loosening of Covid restrictions, consumption should pick up.