Macro outlook for 2023 and beyond part one

MUFG Securities expects markets to perform better in 2023 than they did last year, if only because they have already priced in a lot of the downside risk and the shocks of 2020-22 were so outlandishly large. The most likely outcome may be a shallow recession and equally gradual recovery.

SWISS The team Tom Joyce leads published its 2023 outlook document, The New Macro Supercycle, in mid- January. What can we expect to see in markets in 2023?

JOYCE Although 2023 will be a tricky year, I think there are reasons to be optimistic. Where we are now from a market economic perspective is one of those fundamental points in time, such as 1918, 1945, 1989 and 2008. Some of these were geopolitical events, others were specific to markets.

When we look at the last two years, the magnitude of what has happened, almost all of which was unanticipated, is staggering. We have had the first truly global pandemic in a century, the first land war in Europe in 70 years, last year we had the biggest surge in inflation in 40 years and the fastest Fed [US Federal Reserve] tightening cycle in 40 years.

It wasn’t just the Fed – 84 per cent of central banks globally, or more than 90 central banks, tightened policy at the same time. We know monetary policy operates with a 12- 18 month lag. Due to all the events I have described, last year the aggregate returns for bonds and equities on a combined basis were the worst in a century.

The good news is this year should be better. This time last year the Fed was just beginning a brutal tightening cycle, whereas now we know we are at the end, even though there are still some things to pay attention to. In January 2022, inflation was at the early stages of a historic surge, whereas this year inflation will come down a lot – and maybe faster than we think. How much of it is sticky, and how long it takes to get the last bit out of the economy, is relevant. But it should still come down a lot.

This time last year, the Russian invasion of Ukraine had not yet happened, and when it did energy prices, especially the price of natural gas, surged. Energy prices should come down quite a bit over the course of this year. On a multiyear basis they may work their way higher, for a host of reasons. But energy prices should moderate in 2023.

China was in lockdown a year ago, now it has reopened. The US dollar was in the midst of a historic strengthening this time last year – a 20 per cent strengthening in just 12 months that squeezed the global financial system, especially emerging markets that comprise 40 per cent of global GDP. This year, the US dollar will almost certainly moderate – after strengthening in seven of the last nine years.

In 2022, the market was myopically obsessed and focused on Fed tightening and inflation, whereas in 2023 the focus will likely shift to growth and earnings. The good news about this is that a lot of it is priced in. This is because something very unusual is going on right now: we have the most highly telegraphed recession, almost ever.

Let’s remember that the Fed has not accurately predicted one US recession in the entire post-World War II period. Recessions have typically come out of nowhere. This recession, on the other hand, could be seen coming months ahead of time. Whether or not the US goes into recession might be the less important question. Whether Europe or the US contract by 0.3 per cent or grow by 0.3 per cent, we know there is a major deceleration underway, we can see it and we can price in a lot of it.

We published our 2023 outlook in mid-January. Looking at the Wall Street outlooks published in November 2022, it sounds like they are talking about another world. We have changed a huge amount, in a more positive direction, in just seven weeks.

Back at the end of November, China was in hardcore lockdown just coming out of the National People’s Congress and there was no sign of this changing. Now, it has completely pivoted. In Europe, we were contemplating a deep recession in late November or early December. It turns out the winter has been mild and we have had some really nice flash PMI data.

I don’t think Europe will be able to sidestep a recession but some European countries might have a better chance of doing so than the US does. Even US inflation data since the end of November 2022 has come down faster than consensus views.

All this has fuelled a bear market rally. I don’t think it is a sustainable rally because we still have tricky months ahead. We really need until 2024 to have a broad-based global recovery. If I were to show you a chart of GDP growth rates of every economy in the world today, versus a year ago, you would see downward red arrows. Just about every economy globally is decelerating at the same time.

If we looked at the same chart this time next year, in January 2024 we will likely see almost every major economy in the world accelerating – and this may begin in Q3 or Q4 2023.

SWISS So conditions are weak but markets have priced in most of the downside?

JOYCE A US recession is coming. There is a lot of debate in the market around whether or not we will achieve a soft landing. I wish the market would define ‘soft landing’. In my opinion, it is positive, low single-digit growth somewhere between zero and 0.5-0.8 per cent.

I think we are going to have a mild recession. If we do not, this will be the first time in the modern era that almost all the signals were wrong. The yield curve is inverted, leading economic indices have all gone negative – and they have never had false positives before – and the survey data from PMI, which tends to give a really good view of where the economy is going six months from now, all are in contractionary territory in the US. Now we are starting to see the hard data – retail sales, new orders, inventory levels and industrial production – turn. Anecdotally, I spend a lot of time visiting companies. We are seeing a lot of slowdown in some areas, but others are more positive.

I just returned from the largest aviation conference in the world, held in Dublin in mid-January. Every company I met – from large airlines to engine manufacturers – is seeing unbelievable growth in the sector. There are mixed signals. However, we are inclined to think the vast majority of these signals are pointing to a moderate recession.

What does this mean for markets? I think it means this rally could continue for a little while, but it is probably not sustainable. Historically, equities always, always hit new lows about 5-6 months after a recession starts. With one exception in the last 100 years – in 1945 – credit spreads widen after a recession. I think we are going to have a good year in markets – we should begin to put together the makings of a nice recovery. The recession is coming but it will likely be shallow.

On the other side, the recovery will probably also be shallow. China is like a tightened coil that is about to spring out and drive really nice growth for much of the global economy in the second half of 2023. I wouldn’t be overly bullish China growth on a two-, three-or five-year basis but this year we could see a really strong bounce back that will help a lot of economies around the world, including Europe and emerging markets. It may help the US to a lesser extent because it is still a consumer-driven economy.


China is like a tightened coil that is about to spring out and drive really nice growth for much of the global economy in the second half of 2023. I wouldn’t be overly bullish China growth on a two-, threeor five-year basis but this year we could see a really strong bounce back