Moving into a year of inflections in 2023

AFTER two years marked by disruption, loss and start-stop reopenings, 2022 saw the gradual return of our pre-Covid lifestyles. Unfortunately, 2022 is also a year when inflation is very high, interest rates are still rising and growth expectations are falling. Geopolitical tensions, financial stresses and the legacy of Covid-19 added to the uncertainty. Russia’s invasion of Ukraine, China’s approach to managing Covid-19 and even the financial instability spurred by the UK’s “mini budget” affected global economies through multiple channels. 2022 has not been kind to investors, to say the least.

As we enter 2023, the world economy is decelerating. The US is still in expansion mode, but higher interest rates, tighter financial conditions and weakening property and labour markets will have a lagged, negative impact in the months ahead. The eurozone and the UK are likely already in contraction given the combined impact of the energy crisis, inflation and monetary tightening. And although China has recently started to relax its Covid-19 policies, its economic recovery continues to be delayed by issues relating to Covid-19 and the property market.

We believe 2023 will be a year of inflections as investors try to identify turning points for inflation, interest rates, economic growth and financial markets against a complex geopolitical backdrop. We think that year-on-year rates of inflation have peaked in the US, and are in the process of peaking in Europe. In both regions, we expect inflation to decline till 2023. But the pace and magnitude of the path will contribute to volatility, reflecting investor fears that even higher interest rates may be needed for longer.