We may not be headed for global recession gloom after all

The world is battening down for a long recession in 2023, but the winds may be changing direction
Energy prices and inflation levels appear to have peaked, interest rates are expected to do the same next year and there is even hope that 2023 will bring more easing of China’s zero-Covid policy

David Brown

Published: 10:00pm, 5 Dec 2022

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It’s no wonder people are fretting about the future, but are we being too pessimistic about growth next year? We seem to be talking ourselves into trouble given the prevailing economic headwinds, but it doesn’t feel like a steep recession is imminent while global stock markets are looking reasonably robust and investors still moderately upbeat.

Are stock markets our best leading indicator telling us to look beyond the near-term blues and begin factoring in brighter times ahead? After all, the worst of the bad news is probably already discounted over the Ukraine war, energy prices seem to have peaked, interest rates may be close to topping out, market volatility is down and so too is the safe-haven US dollar.

If there is a recession coming, it should be short and shallow and the glut of liquidity left over from collective quantitative easing should ensure that global recovery, when it comes, will still be flush with funds. It’s time to reassess the outlook.

The news has definitely made tough reading through most of the year. The shock of the Ukraine war, the spike in inflation, the drive for tougher monetary conditions by the central banks, and the downturn in global business conditions have, at times, seen investors, consumers and businesses running for cover.

The JP Morgan, S&P global manufacturing purchasing managers’ survey sums up the mood with the PMI index dropping below the vital 50 boom-or-bust threshold for the last three consecutive months, consistent with contracting business activity.

The last time this global manufacturing PMI was in negative territory business confidence was in free fall at the height of the Covid-19 pandemic in 2020. This time though, things should be a lot different.

Despite all the hype about the onset of recession, global equity markets have still been tapping into a positive vein for the last few months with no signs of capitulation in sight. The US S&P 500 equity index may be down from its post-Covid peak in December last year, but positive momentum appears to be building again.

There are still aspects to draw on for inspiration, not least the possibility that the Fed’s battle against inflation may soon be reaching a conclusion, with clear signs that the headline CPI rate has already topped out. US inflation slowed down to 7.7 per cent in October from a peak of 9.1 per cent in June and the trend should be lower in the coming months thanks to the strong dollar and easier global energy prices.

As inflation risks recede, it should take pressure off the US Federal Reserve to respond with tougher monetary policy ahead. The Fed funds rate, currently in the range of 3.75 to 4 per cent, is expected to peak at around 5 per cent early next year, but the futures market is already factoring in forward interest rates moving back to 4 per cent by the end of 2023 as inflation pressures continue to ease.

Expectations that the Fed could be heading into a policy pivot fairly soon, possibly as early as the December 13-14 Federal Open Markets Committee meeting, is already encouraging equity market hopes that the worst of the Fed’s monetary tightening cycle is almost over.

Jerome Powell (centre), chair of the US Federal Reserve, in Washington, US, on November 30. Powell has signalled that policymakers will soon ease their rapid pace of monetary tightening. Photo: Bloomberg

The message from US economic indicators is better than expected too, not least the booming US labour market conditions. Last week saw another strong set of non-farm payrolls adding an extra 263,000 jobs to the economy in November, much higher than consensus expectations for a 200,000 gain.

With November’s unemployment rate unchanged at 3.7 per cent, it’s another pointer that the US labour market is operating close to full capacity, good news for consumer confidence down the line.

The Organization for Economic Cooperation and Development (OECD) has marked the US economy down for only 0.5 per cent growth in 2023, but the odds are that its forecast is too cautious and growth should exceed expectations.

2023 will be a better year for investors, even with recession looming

There is hope too that China should exceed growth expectations next year as Beijing starts to scale down on its tough anti-Covid restrictions, allowing the economy to return to normal in the process. As the economy catches up for lost time, there’s a good chance that China’s growth rate could exceed the OECD’s forecast for 4.6 per cent expansion in 2023, providing a much-needed boost for the global economy and world trade.

Despite all the talk of an impending crash in 2023, there’s every reason to hope for better times ahead. Global growth could well surprise on the upside in 2023.

David Brown is the chief executive of New View Economics

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