lobal Outlook

A new regime of sustained inflation and transition to sustainability.

The global economy is entering a new regime. As summed up by Blackrock, three long-term variables are playing out: aging populations, geopolitical fragmentation, and the transition to a lower-carbon world. 2023 could be the pivotal year ushering in this new regime.

  • The consensus places the world on a downward trend and is unanimous with regards to the occurrence of recession in Europe in the first half of 2023. This would be soft, with an average estimate of GDP decline of -0.1%. The U.S. may show more resiliency, with a GDP growth of 0.4% thanks to its energy advantage, and face or avoid a mild recession.
  • The broad sentiment is however very negative, as over 75% of fund managers think a recession is likely over the next 12 months – a level roughly on par with peak pessimism during the global financial crisis in 2009 and the COVID-19 pandemic in 2020.
  • The greatest uncertainty remains the extent of the Asian rebound, especially the Chinese transition from a “capital spending to one of consumption-led,” noted Bank of America or Morgan Stanley.
  • The extent of this transition may determine an increase in commodity prices and an appreciation of Asian currencies, explain Lazard and Citi. This would “make it difficult for the Fed and other central banks to back off too quickly,” completes UBS.
  • The Ukrainian war and the potential escalation of the geopolitical conflict, creating further disruptions in the energy and food sectors, is the principal risk.

Inflation – Sustained and unlikely to reach pre-pandemic levels.

  • There is consensus affirming that inflation will cool globally over the year. However, the Central Bank’s targets are not expected to be reached, as inflation is forecasted to be around 4-5% in the U.S. and 6-7% in Europe.
  • According to some institutions, the peak may be reached in Europe in early 2023. Blackrock insists that the world is entering a new regime: “living with inflation.”

Labor market – Resilient and unlikely to fal.

  • The labor market is unanimously perceived as currently strong, due to its status as the main component of the global economy’s resilience. Markets will be paying close attention to it, as disruptions in employment could signal a rapid deterioration in the global economy.
  • Blackrock focused on the aging workforce, which creates a major transformation challenge for consistent economic growth. Labor shortages contribute to the resilience that financial institutions attribute to the labor market.

Equity vs. debt market – Portfolio rebalancing for risk reduction.

Equities – Experiencing lower valuations due to a higher risk-free rate.

  • Most institutions predict a tough year for global equities. U.S. quality stocks are considered more resilient than in other regions. There will be a continued rebalancing of portfolios in favor of private equity, after an already hard period for equities.
  • Specifically, on valuation, Lazard explains that the ongoing increase in risk-free rates will naturally imply a higher discount rate.

Debt – Net inflows to bonds and corporate debt.

  • Overall, economists see a strong trend towards bonds in 2023, to provide a minimum hedge against riskier equities than in recent years.
  • With respect to bonds, institutions show divergent views. Many institutions, such as Lazard, Wells Fargo or HSBC, see opportunities in short-term bonds, while BNY Mellon or Morgan Stanley see an attractive entry point in municipal bonds from intermediate to long maturities. In any case, overall, the trend is clear: bonds, including corporate bonds, will see net inflows.