With a fresh start in 2023, we decided to present you with various expectations for 2023 with the hope that this year will be better than the last one. As we are all aware, on a wider scale the regional capital market is following a global equity sentiment. Therefore, in this blog, we will present you with global equity sentiment from the biggest asset managers and investment banks along with our view of a few specific topics like interest rates and inflation.
2023 is expected to be a challenging year for the world economy. The biggest asset managers, leading investment banks and a few other financial institutions are all predicting a high likelihood of a global downturn with slight deviations in expected impact on financial markets and the real economy. There are also mild recession expectations in the Euro area and milder ones in the US, but risks are skewed to the downside. Specifically, Wall Street strategists are mostly forecasting negative outcomes, with the consensus view being that a mild recession will hit both sides of the Atlantic. However, leading investment banks and assets managers see the economy defying the bearish consensus as price growth eases, signaling big gains for investors if they get the market right. Remembering the pandemic, it is no longer a major consideration for global macro strategists, and the outcome of China’s high-risk effort to rapidly reopen its economy could have profound consequences for the world’s investment and consumption cycle. Also, a Bloomberg News survey carried out at the end of 2022 showed that three-quarters of Economists expect a US recession in the next 24 months. There is no bright future expected for crypto markets, at least in this year, while big investors are not expected to continue supporting the sector in a big way as they were doing it in the previous period. While there is a general consensus that 2023 will be a challenging year, still there is some optimism that the economy may defy the bearish predictions and deliver positive surprises.
Further, a desynchronized economic slowdown and elevated inflation are expected. The consensus view is that central banks will likely be forced to pivot and signal cutting interest rates sometime next year, which should result in a sustained recovery of asset prices and subsequently the economy by the end of 2023. But for that pivot to happen, a combination of more economic weakness, an increase in unemployment, market volatility, the decline in levels of risky assets and a fall in inflation is expected. We expect inflation to stay elevated by the second half of the year, which will result in the central bank’s hiking cycles becoming more mature. Both Fed and ECB are raising their reference rates to prevent price levels from growing further, while it is expected that Fed & ECB will peak their rates at 4.9% and 3.4%, respectively.
Last Friday, we wrote about the latest CPI in the US from the last week and you can read more about it here. In short, we witnessed another decline in US headline CPI to 6.5% (vs. 7.1% in the month before), while MoM the 0.1% decline was reported. Further, below you can see Croatian CPI development. Croatian CPI for the whole 2022 comes out tomorrow and it will be interesting to see if inflation growth starts to flatten on a monthly level. Further, for January 2023 it is expected for CPI numbers to be further elevated by „euro-inflation“ regarding Croatia’s entrance into EMU. It is a common case for countries that adopted Euro as their currency. Higher prices were reported, which was correlated with conversion dates. The total conversion effect on inflation was previously expected to amount to somewhere around 0.5 p.p., further boosting current CPI numbers, as previously reported in the countries that adopted the euro. However, this impact could be understated taking into the account current price increases we are witnessing in Croatia. All things considered, it will be especially interesting to see inflation development in the upcoming months.
Overall, there is a general consensus that 2023 will be a challenging year. But to end on a positive note, there is also some optimism that the economy may defy the bearish predictions and deliver positive surprises. And to draw attention back to the region, we would like to emphasize that the specificity of the region is that it holds some true gems! After all, the market will decide and only time will show the results.