The gist of most 2023 outlooks is for a year of contracting activity at some point, disinflation and peaking interest rates. The investment upshot is a bias for bonds, a snubbing of the overvalued dollar and a volatile year for equities that will struggle to get much beyond current levels in 12 months.
Energy prices, Ukraine and China’s reopening however, remain the biggest wild cards, as they will certainly be affected by the developments in the Russia-Ukraine war.
But neither incoming hard economic numbers nor many senior policymakers have fully bought into the recession idea just yet. This leaves investors mulling the chances of either the fabled “soft landing” – that somehow gets inflation back down without a major downturn – or some protracted scorched earth policy by central banks if persistent growth keeps price elevated.
Many economists now assume the euro zone and British economies – worst affected by the Ukraine-related energy shock and cost of living squeeze – are already in the throes of recession.
Yet this week’s upward revisions to U.S. third-quarter output, persistently tight labor markets and the unshakeable assumption of a Chinese mini-surge after a new year reopening from strict COVID lockdowns all speak otherwise.
It’s striking how many policymakers and Federal Reserve chief Jerome Powell on Wednesday insisted that a U.S. “soft or softish” landing remained possible, with inflation easing without a dramatic rise in unemployment.
In comments that lifted world markets – something that itself is an indirect softening of financial conditions supporting the economy – the chairman said the Fed didn’t want to “overtighten” just to “crash the economy and then clean up afterward.”
Powell’s more hawkish wing at the Fed is also skeptical of a recession narrative. St. Louis Fed President James Bullard on Monday said recession is not inevitable and suspected that expected disinflation was instead responsible for inverting the yield curve.
European Central Bank chief Christine Lagarde still speaks of euro zone growth weakening into next year – but not contraction. And her hawkish wing also thinks recession fears are overblown.”If you look at Germany, where actually the economy is doing better than then was feared, it’s not a foregone conclusion that we will get a recession,” Dutch Central Bank chief Klaas Knot said on Monday in Paris, insisting weaker growth did not mean a downturn.