2022 mid-year outlook

Summary

Forecast Changes

• We have become more pessimistic on the outlook for the global economy in 2023, and we now forecast global GDP growth of just 1.7% next year. The sharp downward revision comes from our view that the U.S. economy will fall into recession next year and contagion effects will result in the multiple recessions across the G10 and emerging markets. We now forecast the U.K. economy to enter recession, while we also believe reduced U.S. demand can tip Mexico into recession come 2023.
• Given our view for a U.S. recession in mid-2023, we now believe the Federal Reserve could eventually look to unwind monetary tightening. We forecast the Fed's terminal rate to now reach 4.50% in early 2023; however, we believe the FOMC will look to lower its Fed funds rate by a cumulative 50 bps by the end of next year in an effort to cushion the economic downturn. We also look for the Bank of England to begin lowering policy rates next year, while many emerging market central banks should also ease monetary policy by the end of 2023.
• Our short to medium term view on the U.S. dollar is unchanged, and we continue to forecast a stronger greenback against most foreign currencies through early 2023. With the U.S. economy now likely to fall into recession and the Fed to start cutting policy rates, we now believe the dollar will peak in mid-2023 and start to gradually weaken in the second half of next year.

Key Themes

• Aggressive monetary policy tightening and reduced consumer purchasing power are weighing on economic activity, and raising the probability of recession in many major economies. Going forward, the prospects for global growth have dwindled as central bank rate hikes and elevated inflation disrupt economies around the world. With U.S. recession now more likely than not, we believe European countries and emerging market nations with strong trade linkages to the U.S. are also at risk of falling into recession.
• As hawkish as most central banks have been this year, we now believe some central banks could look to unwind tighter monetary policy in the second half of 2023. Recession in the U.S. and U.K. should result in the Fed and Bank of England lowering policy rates, while many emerging market policymakers will likely follow the path of the Fed. It is possible the latter part of 2023 could mark the beginning of "The Great Unwind".
• Dollar strength should persist through early 2023; however, peak dollar strength may be approaching earlier than we initially expected. As the Fed eases monetary policy in late 2023, we believe the dollar's rise should slow by the middle of next year and the greenback should eventually start to weaken against most foreign currencies. We continue to believe Latin American currencies will be the outlier. Political risks and mature tightening cycles should keep Latin American currencies from strengthening during our forecast horizon.

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