Global banks make chilling predictions about world economy in 2023

Chaos and disappointment defined the global economy in 2022 - and now the top banks have predicted more financial headaches this year, albeit with a few silver linings.

An analysis of the 2023 macro outlooks from six major institutions has revealed some mixed forecasts. JPMorgan predicted a bad year for the economy, but a better one for markets.

According to its investment outlook, inflation should start to moderate "as the economy slows, the labour market weakens, supply chain pressures continue to ease and Europe manages to diversify its energy supply".

JPMorgan's core scenario sees developed economies falling into a mild recession, with only a low risk of a severe, housing-led recession similar to the GFC in 2008. That's largely because it expects limited housing stock to prevent steep price dives. Goldman Sachs predicts a recession in Europe and China's bumpy Covid recovery will drive a low global growth of 1.8 per cent this year.

But it expects the US to "narrowly avoid recession" as core PCE inflation slows from the current rate of 5 per cent to 3 per cent in late 2023, along with a forecast 0.5 per cent rise in the unemployment rate. "The Great Moderation, the fourdecade period of largely stable activity and inflation, is behind us," it said in its 2023 global outlook. "The new regime of greater macro and market volatility is playing out. A recession is foretold; central banks are on course to overtighten policy as they seek to tame inflation."

The bank recommends a new investment playbook that reflects the harsh reality of equities that have a lot further to fall, an adjustment to living with inflation of about 2 per cent and no return of the past bull markets. Fidelity International has a similarly negative outlook, warning 2023 will feel the impact of the Ukraine war and a shift in monetary regime from supporting global markets to taming inflation. In its foreword, CEO Anne Richards said central banks were concerned about supply side pressures that could embed inflation into economic systems and boost wages and prices.

"As they tighten financial conditions in response, the risk of a hard landing is increased, and could play out as an economic contraction and labour market weakness," Ms Richards wrote. But she expects some supply chain pressures of the past year to weaken as prices for air, sea, and land freight fall and Covid lockdown backlogs ease.

The deflation is already evident in a sharp decline of container freight rates, according to Apollo Global Management. That's how finance writer and analyst Genevieve RochDecter summed up the bank's forecast, tweeting: "Apollo says that historically, it takes two full years for inflation to go from its peak back to the 2 per cent level. "One more note: The quality of outstanding subprime credit is decreasing, but not so much as to cause concern of a credit crisis," she said. RochDecter also pointed out how Deutsche Bank expects inflation to tame quickly, with a CPI forecast of 4.1 per cent in the US. "They also believe that the market has already priced in current inflation levels, and equities will get off to a good start in 2023 if inflation continues to decline," she wrote.

According to HSBC's outlook, the global economic slowdown will still be a key headwind for stocks. It predicts diversification can be increased by an overweight in high-rated bonds - such as private companies, real estate and hedge funds. "As the growth cycle lags the rate cycle, we much rather take rate risk than cyclical risk," the outlook reads. "But while the cyclical outlook remains a major challenge, we are starting to see a silver lining on the rate front."