2022 was a year of profound transformation, of shifting geopolitical and economic paradigms. Looking ahead, 2023 should see a change of direction in key economic variables. Headline inflation should decline significantly, central bank rates should reach their cyclical peak and the US and the euro area should spend part of the year in recession. 2023 can be considered as a year of transition, paving the way for more disinflation, gradual rate cuts and a soft recovery in 2024.
Outlook for GDP growth, inflation, interest rates and exchange rates
The latest economic indicators updated on January 2 2023 and the coming calendar
From an economic perspective, 2022 will go down in history as the year in which elevated inflation made a surprising comeback forcing major central banks to start an aggressive tightening cycle. It is highly likely that in twelve months’ time we will look back at 2023 as a recession year, a year of disinflation, and a year in which official interest rates reached their terminal rate and stayed there. As usual, the list of ‘known unknowns’ is long. Energy prices might increase again after their recent decline, disinflation might be slower than expected, policy rates might peak at a higher level than currently priced by markets, and the recession might be deeper and longer than anticipated
The markets overview updated on the December 12, 2022: Money & bond markets, exchange rates, commodities, equity indices, performances, and much more.
An update of the GDP Growth and inflation data, interest and exchange rates
Companies in the United States and the euro area continue to struggle to fill vacancies. This will probably make them reluctant to lay off staff when economic conditions worsen, fearing that during the next upturn they would rapidly face new hiring difficulties. By limiting the increase in unemployment, such labour hoarding would be a source of resilience. However, this would be reflected in a decline in labour productivity, which would weigh on profits and could push companies to increase selling prices, thereby slowing the pace of disinflation.
The manufacturing PMI shows a contrasting picture in November, with another significant drop in the US and a rebound, from a low level, in the euro area. France, Germany, Greece, Italy and Spain recorded an improvement but the index declined in the Netherlands. Brazil saw an exceptional drop so next month’s data will be key to see whether this was a one-off. Also noteworthy is the drop in Vietnam from 50.6 to 47.4. New orders dropped again in the US although the index remains above that in the euro area, where it has rebounded. France, Germany and Italy benefited from a particularly strong increase, but the levels remain very low and well below the 50 mark. The situation worsened in Japan and Vietnam and even more so in Brazil. India saw an improvement from an already high level.
The number of new Covid-19 cases continues to increase across the world for the third consecutive week. 3.2 million new infections were recorded between 24 and 30 November, up 10% on the previous week. This rise was seen across all regions, with the exception of North America, where the number of cases fell by 12%.
Our different uncertainty gauges are complementary, in terms of scope and methodology. Starting top left and continuing clockwise, US economic policy uncertainty based on media coverage has been on a rising trend over the past twelve months. This is related to the policy tightening by the Federal Reserve. The latest observations however do not show a clear trend.
Disruption in global trade has continued to abate. Despite this, there could still be major trade friction this winter, in addition to the direct repercussions of the war in Ukraine. China is facing a record rise in Covid-19 infections, and its Zero-Covid policy has shut down several plants in Henan province, which is home to the production lines for major global technology groups.
Between 17 and 23 November, 2.9 million new cases of Covid-19 were recorded worldwide, an increase of 13% on the previous week. This is the second consecutive week with an increased number of infections. All the regions of the world are affected, with South America notable for a significant resurgence in cases.
After falling for a month, Covid-19 pandemic figures are again rising slightly in most regions of the world, but remain at a low level. The weekly proxy indicator for GDP is relatively stable or even on a slightly downward trend in the United States, France, Germany, Spain, Belgium and Japan.
The global manufacturing PMI was down again in October, with significant drops in the United States, the euro area, Austria, Germany, Greece, Italy, Spain, Switzerland and the United Kingdom. China saw an improvement but the index stayed below 50. The steep downtrend of new orders continued in the euro area and its member countries, with the exception of France, where the decline in October was more limited after the big drop the previous month. Orders were also down strongly in the US -where the rebound in September clearly did not last- as well as in the UK. China recorded some improvement. India continues to benefit from strong order inflow.
The number of new Covid-19 cases continues to decline in most parts of the world. For the first time since 20 October 2021, the number of infections has fallen below 3 million per week (seven-day moving average). Thus, 2.45 million new cases were recorded between 27 October and 3 November 2022, a 15% drop compared to the previous week (Chart 1). More generally, the number of new cases continued to fall sharply in Europe (-34%) and, to a lesser extent, Africa (-8%), while it stabilised in North and South America. In Asia, the number of cases is on the rise again (+11%), particularly in Japan (333,980, +25%), South Korea (293,934, +35%) and Taiwan (270,077, -3%).
Our different uncertainty gauges are complementary, in terms of scope and methodology. Starting top left and continuing clockwise, US economic policy uncertainty based on media coverage has been on a rising trend over the past twelve months. This is related to the policy tightening by the Federal Reserve and concern about its consequences in terms of growth. In the US, the latest data show an increase of business uncertainty about sales revenue growth.
UK, Greece, South Africa: the strikes in the ports industry have multiplied in recent days, leading to disruptions to activity, in particular in South Africa. However, global maritime traffic continued to decongest and freight, as measured by the Freightos index, fell to its lowest level since the end of December 2020 (Figure 5). This represents a fall of 70% from the peak in September 2021 and a two-thirds drop in costs since the beginning of 2022.
A sum-of-the-parts analysis, which is popular in corporate finance, has made its way in the world of central banking, reflecting concern that the multitude of synchronous rate hikes could have a combined tightening effect that is larger than the sum of its parts. To the extent that inflation in a given country is largely a function of global slack, these hikes could cause an unexpectedly large decline in inflation. Rising import prices due to currency depreciation are another factor because they could force countries to tighten monetary policy. Confidence effects may also play a role, especially at the level of export-oriented companies.To address these risks, central banks could insist that synchronous rate hikes should moderate inflation expectations globally
When growth is slowing, risks tend to be tilted to the downside because households and companies adopt a more cautious attitude in their spending and investment decisions. At the present juncture, it is also difficult to see what could create an upside surprise. To the contrary, according to the IMF, there are several downside risks: the cost of energy, the problems in Chinese real estate, persistent disruptions in the labour market. Financial conditions could deteriorate. Already today they create a discomforting environment, with the risk of a non-linear impact on growth. It illustrates the challenge of central banks with growth-at-risk being at the low end of historical ranges and inflation at the other extreme.
The growth in the number of new Covid-19 cases continued for the fourth consecutive week in Europe. According to the latest data from Johns Hopkins University, European countries have recorded 59% (1.92 million out of a global total of 3.25 million) of new Covid-19 infections diagnosed in the last seven days (chart 1). In that region, the highest number of infections was recorded by Germany (632,167, +54%), followed by France (382,191, +21%), Italy (282,347, +26%), Russia (156,489, -26%) and Austria (95,894, +20%). The five countries account for 81.4% of new cases in Europe.
The global manufacturing PMI has continued its decline in September. There was a small improvement in Canada and the US but the euro area recorded a further decline, with data dropping in France, Germany and the Netherlands. The index was also down in China whereas India, Indonesia and Vietnam are holding up well. The situation deteriorated significantly in terms of new orders. It is particularly bad in the euro area and the UK although the negative environment is now very broad-based across countries. Orders were down in Japan and China as well, whereas Indonesia saw an improvement. Despite the low readings for the overall index and in particular the new orders component, the employment survey continues to show some resilience.
The weekly number of new cases of Covid-19 in Europe has continued to increase, for the third consecutive week, with 1.7 million new infections between 29 September and 5 October, an increase of 17% compared to the previous week. The number of people frequenting shops and leisure facilities is very slightly above its pre-pandemic level in Belgium, while it has recently gone back to slightly below this level in Italy. However it remains somewhat more noticeably below pre-Covid levels in the rest of our sample (France, Germany, Spain, Japan, the United Kingdom and the United States).
Inflation has been the dominant economic theme for months, but, under the influence of aggressive monetary tightening, one can expect this won’t last. At the same time, recession concerns are mounting. Central bankers acknowledge that their action may cause a technical recession, a huge majority of US CEO’s expect a recession and consensus forecasts show an increased recession risk in the US and even more so in the euro area. The recession narrative should lead to a wait-and-see attitude, of putting spending and hiring decisions on hold and creates a mutually reinforcing negative interaction between hard data and sentiment. A key condition for this to end is growing belief that central banks will have done their job and can afford to stop tightening
On the whole, global trade tensions are continuing to subside, but new areas of friction are emerging as a result of the war in Ukraine. The New York Federal Reserve’s supply-chain pressures index has fallen significantly since the beginning of the year to reach its lowest level in 18 months in August. Another visible indicator of this reduction in bottlenecks is shortening delivery times: the global manufacturing PMI (purchasing managers' index) rose to 44.8 in August from 35.8 four months previously. A rising figure indicates a reduction in delivery times. However, this remains below its historical pre-pandemic average.
3.4 million new Covid-19 cases were recorded worldwide from 14–21 September, a fall of 4% compared to the previous week. This is the smallest decrease since August last year. All regions of the world are affected with the notable exception of Europe, which recorded an increase for the first time since last July (an 18% rise). Of the 3.4 million new cases making up the worldwide total, 1.3 million were reported in Europe (38.2% of all cases).
