Daniele Antonucci
Chief Economist & Macro Strategist
Financial markets have been dominated by rising interest rates over the past year as the world’s major central banks continued to focus on taming persistently high rates of inflation. Their efforts to apply the economic brakes are working, with the euro area and UK likely beginning 2023 in recession. The US economy is also likely to contract at some point, although less severely.
This prolonged high inflation was partly driven by disruptions to Russia’s supply of oil and gas to Europe owing to the Ukraine War, which pushed up energy prices. This headwind is likely to continue in the first half of the year. Another drag on the world economy has been China’s zero-Covid policy. A series of prolonged lockdowns affected manufacturers and their suppliers, which has caused the country’s exports to fall. But with China now looking to relax its Covid-restrictions, we could see growth pick up again.
We believe conditions will start to improve from spring as the interest rate hiking cycle ends, inflation slows more visibly and China’s reopening progresses. These shifts are likely to trigger a new global economic cycle, with the key regions expanding at their own speeds.
With markets set to go through this transition over the next year, we believe investment strategy at the start of 2023 is less about whether to increase or decrease risk in portfolios, and more about focusing on positions within key asset classes and regions. Having said that, unexpected events can appear that cause large shifts in investor sentiment (as clearly shown in recent years) so we’ll be monitoring markets for any catalysts that would give reason to change our approach.
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Inflation begins to ease, first in the US and then in the euro area and UK.
However, it is likely to remain above pre-Covid levels.
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The US Federal Reserve announces that it is no longer increasing interest rates,
followed by the European Central Bank and Bank of England.
But we don’t expect rate cuts in 2023.
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The government relaxes its zero-Covid policies
and stimulates the economy with additional measures.
From a low point, growth rebounds moderately.
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