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SCMP Series
What will the global economy look like in 2023?
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2023 could be a year to remember as investors’ appetite for risk returns
An employee works on the assembly line of Great Wall Motors in Chongqing on September 22. China’s expected recovery should be a blessing for global recovery and world trade growth in 2023 as economic activity speeds up again. Photo: Xinhua
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Expect a bumpy 2023 as central banks face high inflation and low growth
US Fed chairman Jerome Powell speaks at the Brookings Institution in Washington, DC on November 30. Investors are concerned that the central bank’s resolve to keep raising rates could tip the economy into a recession. Photo: Bloomberg
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China’s economic recovery plan? Expect a big push for domestic demand
Illustration: Stephen Case
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What trends will shape the global economy in 2023?
People pose for selfies outside a popular bakery in Beijing on December 28. China says it will resume issuing passports for tourism in another big step away from pandemic controls that isolated the country for almost three years, setting up a potential flood of Chinese going abroad for next month’s Lunar New Year holiday. Photo: AP
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Liquidity crisis could be global financial system’s ‘silent killer’ in 2023
An employee of the foreign exchange trading company Gaitame.com works in front of a monitor showing a graph of the Japanese yen exchange rate against the US dollar at its dealing room in Tokyo on December 20. Photo: Reuters
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Five market indicators investors should watch in 2023
Pedestrians pass the New York Stock Exchange (NYSE) in New York, US, on January 3, 2023. Photo: Bloomberg
An employee works on the assembly line of Great Wall Motors in Chongqing on September 22. China’s expected recovery should be a blessing for global recovery and world trade growth in 2023 as economic activity speeds up again. Photo: Xinhua
Opinion
Macroscope
by David Brown
Macroscope
by David Brown

China recovery and policy easing could make 2023 a year to remember for investors

  • With so much bad news already factored in during 2022, there is the chance markets could be surprised on the upside by unexpectedly better news in 2023
  • The stock market’s reputation as the top predictor of the economic cycle means investors should anticipate better news rather than looking over their shoulders
David Brown
David Brown
Why you can trust SCMP
Investors have some tough choices ahead in 2023, and it’s all down to whether the global economy rallies or succumbs to recession in the coming months. The markets are divided, with optimists hoping for an early end to the Ukraine war and global interest rates levelling out while pessimists see more gloom from the cost-of-living crisis and world economic activity suffering more duress.
Stocks and bonds have both endured tough times in 2022, the US dollar’s strong run has come unstuck and investor sentiment generally remains defensive given the dearth of good news. The world will no doubt be happy to see the back of 2022, but the burning question is whether 2023 marks a return to normality and risk appetite taps back into a positive vein again.

On the positive side, there is still plenty of liquidity to nurture global economic confidence and boost financial markets. With a bit of luck, 2023 should be the year of cautious recovery.

The problem is that there is so much uncertainty. When the chips are down, investors naturally prefer to duck for cover into safe haven bolt-holes like cash, ultra-safe government debt such as German bunds and the US dollar.

With the war in Ukraine, the global inflation spike, higher interest rates and the threat of recession, it is no surprise world equity markets are feeling the strain. The US S&P 500 share index is down about 20 per cent in 2022 and risk aversion is on the rise again.

Even government debt markets have turned the tide on the recent bear market for fixed income. US Treasury yields have fallen in the last two months on safe haven fears as investors have begun to fret about the risk of impending recession.

People walk past the New York Stock Exchange during afternoon trading. Photo: Getty Images via AFP

From a macroeconomic perspective, it’s hard to see where the good news is going to come from. There is always a risk the world descends into recession in 2023 on a perfect storm of adverse events – the Ukraine war intensifies, the inflation crisis worsens, central banks get tougher and global economic confidence subsequently implodes.

Even so, the Organisation for Economic Cooperation and Development (OECD) remains relatively upbeat and is still forecasting 2.2 per cent global growth for 2023 and 2.7 per cent for 2024. This is down from 3.1 per cent this year and below recent trend growth of about 3.4 per cent. It might look lacklustre, but it is far from a disaster.

With so much bad news already factored in during 2022, there is the chance that markets could be surprised on the upside by a confluence of unexpectedly better news in 2023. The possibility of détente emerging between Russia and Ukraine next year, an easing in global energy prices and a softer tone from the central banks might just provide the much-needed lift for economic confidence and world financial markets.

02:01

Russia fires nearly 100 missiles at Ukraine in a day, causing widespread power outages

Russia fires nearly 100 missiles at Ukraine in a day, causing widespread power outages

There is a chance the Fed has already reached optimal interest rates with the Fed funds rate at 4.25 to 4.5 per cent. The greater part of its tightening could be over. By the end of 2023, with 2022’s inflation scare receding, the Fed could be coaxing interest rates down again. It’s the main reason the US dollar is under pressure and other, higher-risk currencies look like a better bet right now.

As China continues to relax its tough anti-Covid measures, it should pave the way for stronger recovery. The mainland economy is expected to bounce back by 4.6 per cent in 2023, according to OECD forecasts, after a likely 3.3 per cent expansion in 2022.
While the United States and Europe could face much lower growth around 0.5 per cent next year, China’s expected recovery should be a blessing for global recovery and world trade growth in 2023 as economic activity speeds up again. Consumer and business confidence might look vulnerable at the moment, but as domestic demand makes up for lost ground, mainland growth could move back towards 5 per cent by 2024.

There might be plenty of challenges ahead, but the investment climate should eventually tilt back towards equities and risk assets on a longer-term view. There is more than enough global liquidity left over from the accumulation of central bank monetary reflation since the 2008 financial crash and during the Covid-19 pandemic to keep world financial markets amply funded during the next few years.

How important is consumption to China’s economy?

The Fed’s intention to slim down its bloated balance sheet from past debt buy-backs under its quantitative easing programme will have a limited effect on the morale of equity markets going forwards. The European Central Bank’s plans to shrink its balance sheet from March 2023 are unlikely to make much difference, either.

The stock market’s reputation as the best forward predictor of the economic cycle means investors should be anticipating better news ahead rather than looking back over their shoulders at the shock of 2022’s events. Consensus surveys seem to suggest the S&P 500 should be able to make a modest 10 per cent gain in 2023, but the odds tend to favour something better as the fog clears on recovery next year.

As the appetite for risk builds momentum in 2023, stocks should gain the upper hand over bonds. If we are lucky, 2023 should be year to remember for good reasons rather than bad ones.

David Brown is the chief executive of New View Economics

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