Top 10 economic predictions for 2023 (2024)

BLOG Jan 04, 2023

Below, we offer our top 10economic predictions for 2023:

1. We expectCOVID-19 to continue its transition to a global endemic and thestatus quo to prevail in Russia's war in Ukraine, with no materialimplications for the global economy.

Residual effects of theCOVID-19 pandemic include episodic shortages that have complicatedbusiness planning and logistics and held prices higher than wouldotherwise have been the case. As the world moves into 2023 andcontinues the transition to an endemic, COVID-19-related shortagesshould become less frequent, helping prices in affected goods toease further over the year.

Uncertainty around thecourse of the conflict in Ukraine remains and builds a premium intoenergy and other industrial commodity markets. We expect that thewar in Ukraine will continue without major escalation through atleast early summer, when a cease-fire may be achieved. Thatscenario will not end the conflict and economic sanctions andvoluntary embargoes will remain. We do not expect renewed surges incommodity prices stemming from that conflict or the West'sresponses.

Looking ahead, softeningglobal demand will be the dominant story and dampen inflation.While crude oil prices should ease over 2023, high energy costswill put a floor under the prices of processed materials and limitthe decline in inflation.

2. Inflation willslow significantly in 2023, but achieving central bank targets willbe a multiyear process.

After reaching multidecadehighs in 2022, global inflation will moderate in response totightening financial conditions, softening demand, and easingsupply chain conditions.

Downward price pressures arealready in the pipeline. S&P Global Market Intelligence'sMaterials Price Index, a comprehensive indicator of industrialcommodity prices, has fallen nearly 30% from its record high inearly March. Agricultural commodity prices are in the early stagesof a correction and should decline through 2023, led by grainprices. Commodity price declines will filter downstream tointermediate and finished products, bringing some relief tobusinesses and consumers in 2023.

Yet, labor shortages andwage acceleration are contributing to the persistence of inflation,especially in services. In some sectors, such as machinery whereprice increases in 2022 did not keep up with input cost inflation,margin restoration will be a priority.

It could take several yearsto sustainably bring inflation rates down to central bank targets.Global consumer price inflation will likely ease to an average of5% in 2023, finishing the year at a 3.5% year-on-year pace.

3. Global monetarypolicy tightening has further to go out heading to spring 2023 withmuch regional variation.

In the US, we expect thefederal funds rate to peak near 5% next spring.

While the European CentralBank (ECB) moderated the size of its rate increases in December,its accompanying guidance was more hawkish than expected,suggesting the hiking cycle will continue well into 2023.

Many central banks in theregion typically shadow ECB policy. The Bank of England (BoE) is anexception and faces US-style wage pressures. Still, with arecession already under way, recent fiscal tightening and concernsover a housing crash suggest the BoE will not go quite as far asthe Fed. We expect a peak bank rate of 4% in spring 2023.

Monetary easing will likelybegin earliest and be most pronounced in Latin America and emergingEurope. There, central banks tightened policy relatively early andsubstantially as inflation soared from 2021. We expect theBrazilian central bank to start lowering rates in mid-2023.

We do not expect the Fed toreverse course until it is confident that inflation will declinetoward its 2% objective, implying rate cuts only from 2024 anddisappointing futures market expectations of easing from late 2023.In broad terms, we see the same outlook for the ECB.

4. Mild recessionsare forecast in the United States and Europe, but resilience inAsia Pacific will prevent a global recession.

In the US, persistentlyelevated inflation and extraordinarily tight labor markets haveprompted a sharp monetary tightening that has resulted in higherTreasury term yields, wider spreads to yields on private bonds andmortgages, US dollar appreciation, a swoon in stock prices, asudden reversal in house prices, and a notable increase infinancial market volatility.

With a lag, and against thebackdrop of waning pandemic-era fiscal relief, this broad andsignificant tightening of financial conditions will tip the USeconomy into a mild recession in the first half of 2023.

We forecast relativelyshort-lived and mild recessions in the EU/eurozone during thefourth quarter of 2022 and the first quarter of 2023, reflectingmultiple headwinds and matching consistently with recent PurchasingManagers' Index™ (PMI™) data. The primary driver of expected realGDP contractions is private consumption given an acute squeeze onhousehold real incomes due to exceptionally high inflation. A moresevere, energy-driven recession will remain a potential risk beyondthe current winter.

Asia Pacific is forecast tobe the fastest-growing region of the global economy in 2023, actingas a counterweight to recessions in the US and the EU. Thisscenario reflects improving growth prospects in mainland China andcontinued economic expansion in other major Asia Pacific economies,including India and Southeast Asia. Australia, Indonesia, andMalaysia will continue to benefit from high commodity exportrevenues, particularly for oil, liquefied natural gas (LNG), andcoal. Recessions in the US and the EU will dampen the region'seconomic performance since these economies purchase 27% of theregion's exports.

Moderate expansions in AsiaPacific, the Middle East, and Africa will keep the global economymoving forward through 2023. Global real GDP growth is projected toslow from near 3% in 2022 to half that pace in 2023.

5. Housing marketswill continue to weaken in the face of rising mortgage rates, butprice declines may be tempered in some markets by still tightsupplies relative to demographics.

In response to monetarytightening, mortgage rates will remain elevated through 2023. As aresult, consumers who had previously locked in low rates will optto remain in their current homes, and potential new homeowners willstay on the sidelines as purchasing a home is no longer affordable.Recession expectations and the cost-of-living crisis will furtherreduce demand and push prices lower in 2023, especially inovervalued markets.

We do not expect a marketcrash or full correction of price bubbles owing to the relativestrength of labor markets. However, a need for even higher interestrates to counteract persistent above-target inflation or asignificant increase in unemployment would increase the risk of acrash, leading to deeper and longer recessions. The highest risksare in Europe, the US, Canada, and Australia.

6. The US dollar haslikely peaked and will retreat in 2023, but it will remain elevatedcompared with prior years.

Supported by favorableinterest rate spreads and investors' flight to safety, the USdollar appreciated sharply over the first ten months of 2022,reaching unsustainable heights against the yen, the euro, and othermajor currencies before pulling back.

These forces will buoy thedollar through the first half of 2023. Subsequently, we expect thedollar to depreciate under the weight of large US current-accountdeficits and subdued economic growth.

The euro, which has weakenedin response to the eurozone's vulnerability to the impacts of theRussia-Ukraine war and cautious monetary policies, will recovergradually. Meanwhile, some narrowing of US-Japan, long-terminterest rate spreads and Japan's comparatively mild inflation ratewill lead to some unwinding of the yen's sharp 2022 depreciationagainst the US dollar.

7. Emerging anddeveloping economies (EMDEs) will remain resilient during 2023, butpockets of vulnerability will result in a two-tier growthpath.

Higher interest rates inadvanced economies, in combination with the expiration of mostCOVID-19 support measures in 2022, will have spillover effects forEMDEs.

The risks of higher defaultrates among domestic borrowers and sovereign debt restructuringhave increased, but a wave of crises remains unlikely. Real GDPgrowth will be more vulnerable in EMDEs with slow policy responses,higher debt loads, and smaller external buffers, such as Zambia,Malawi, and Belarus.

The possibility of debtrestructuring under the G-20 common framework, instead ofdisorderly defaults, is more likely for low-income, debt-distressedcountries, especially in sub-Saharan Africa.

As a region, Asia Pacifichas adopted more prudent policies since the Asian Crisis of thelate 1990s and has more manageable debt levels and healthierexternal buffers. Asia Pacific will also benefit from lingeringpent-up demand from the later lifting of COVID-19 lockdownmeasures, the resumption of pandemic-delayed infrastructureprograms, relatively low inflation, and the modest recovery inmainland China's growth.

In contrast, emerging Europewill be severely affected by the slowdown in the eurozone and thecontinued impact of Russia's war in Ukraine.

8. Mainland China'seasing of containment policies will propel a choppy economicrecovery.

Given the likely outbreakwaves in the wake of policy changes, the government will proceed toexit by balancing between alleviating public fatigue of containmentmeasures and minimizing potential public health fallouts from theexit.

While financial markets maystage energetic rallies in response to the retreat of the policy,initial recovery of the real economy will be subdued, calling foraccommodative economic policies to smooth the bumpy path.

9. Supply chaindisruptions will ease markedly in 2023, but tensions from laborshortages will remain.

One of the lessons from theCOVID-19 pandemic and its following recovery was that global supplywas not geared to face the extreme demand shock that occurred uponthe reopening of the world's major economies.

The recessions in Europe andNorth America that we anticipate in 2023 will help narrow theglobal supply-demand gap. That process has already started: S&PGlobal's PMI™ data show that global supplier delivery times in themanufacturing sector in November were down significantly from thepeak in early 2022, with room to narrow further in someindustries—equipment goods, mostly—as demand softens in2023.

However, the easing ofsupply chain disruptions will likely be limited given laborshortages.

10. Labor shortageswill remain a challenge in 2023 even as unemployment rates arepredicted to rise modestly.

Economies that depended onmigration for the provision of labor to keep their economieshumming before the pandemic — the US, Canada, Western Europe,and Australia — will see migration flows improve, but probablynot fast enough to head off capacity constraints.

In emerging markets, thewave of workers that moved from urban to rural areas during theworst of the pandemic will be slow to return, alongside a continuedslow recovery of cross-country labor migration. Gulf CooperationCouncil countries are an exception as migrants from East Africa andSouth Asia will remain crucial in supporting planned investments,given the insufficient local labor markets.

Another exception isemerging Europe — a significant share of Ukrainians andRussians who emigrated owing to the war in 2022 will remain abroadin 2023, boosting the population and potential labor force of othercountries across Europe and Central Asia. Nevertheless, severalcountries face the risk of wage-price spirals amid skillsmismatches and slow progress in containing inflationexpectations.

Globally, hiring freezeswill be more common than mass layoffs in 2023 as employers seek toretain talent. Job losses will be concentrated in sectors that aresensitive to credit conditions, such as real estate andfinance.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.