2023 global economic outlook

Summary

Forecast Changes

• We have not made significant changes to our country-specific or global growth outlooks, and continue to believe the global economy will enter recession in 2023. As of now, we believe over 35% of the global economy will slip into recession next year, and forecast global GDP growth of just 1.7%. Should our global GDP forecast prove accurate, the global economy will grow at the slowest pace since the early 1980s.
• While inflation has likely peaked, we believe central banks will continue to prioritize controlling inflation and will raise interest rates into early 2023. However, tightening cycles are likely to end early next year, and as inflation recedes, we believe most central banks will shift toward supporting growth. We expect select G10 central banks to ease monetary policy by the end of 2023; however, central banks in the emerging markets may decouple and initiate easing cycles earlier in the year.
• Our view on the U.S. dollar is little changed, and we continue to believe the greenback can experience a bout of renewed strength into early 2023. With the Fed likely to deliver more hikes than markets are priced for, a hawkish Fed should support the greenback. In addition, more Fed hikes combined with an ECB that is now set to deliver aggressively on rate hikes should result in further unsettled global financial markets. Volatile global financial markets should attract safe haven support to the dollar and boost the greenback into Q1-2023.

Key Themes

• Our key theme for 2023 is that of trade-offs, meaning, the combination of elevated inflation and aggressive central bank tightening in 2022 is likely to lead to recessionary conditions forming across many of the world's largest economies, both developed and emerging, in 2023. Higher interest rates can hurt consumers across the G10, especially those economies saddled with an elevated amount of household debt and variable rate mortgages.
• The inflation issues that defined 2022 will largely still be present in 2023. While headline inflation is likely headed on a downward trajectory, core inflation can prove to be more persistent and remain above central bank target ranges for all of next year. With inflation still elevated, central banks still have work to do as far as containing price growth. However, with recessions imminent, policymakers are likely to shift toward supporting growth and protecting against deep and prolonged economic downturns.
• Geopolitical developments rattled financial markets and disrupted global economic trends this year, and while the 2023 election calendar is light, politics and geopolitics can still have an impact on the global economy and financial markets. We will be particularly focused on the evolution of local politics in the emerging markets, with more of a focus on previously elected administrations in Latin America as well as upcoming presidential elections in Argentina and Turkey.

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