Considering all of 2022’s economic setbacks, the outlook for the new year is dark, with recession fears ruling much of the discussion. However, an old finance-industry rational and current real-economy developments may have weakened the pessimists’ position.
The causes for such pessimism are not difficult to identify. The enormous inflationary surprises of 2022 caused a massive and swift tightening of monetary policies in most major nations, and leading central banks have maintained their tough stance. Although the Federal Reserve of the United States decreased the amount of its interest-rate hikes from 75 basis points to 50 basis points in December, it has stated that additional rate hikes are anticipated – and that a rate cut is not in the cards for 2023. To make matters worse, numerous other issues, such as Russia’s war in Ukraine, are still simmering, threatening supply chains, markets, and economies around the world.
Nonetheless, other recent developments provide some grounds for optimism. Commentators may soon change their tune, making investors more susceptible to embracing a different collective narrative than the one that has influenced their behaviour thus far. There are three possible explanations for this.
First, despite the ongoing conflict in Ukraine, several commodity prices, particularly natural gas, are expected to fall dramatically in the second half of 2022. This not only raises the likelihood that inflationary pressures will ease, but it also implies that companies’ and consumers’ disposable income are not as fragile as previously anticipated. Moreover, some high-frequency indicators for late 2022 and early 2023 have performed better than projected, particularly in Europe.
Second, several inflation indicators on both sides of the Atlantic have been better than predicted, particularly the most recent US wage-data series. Whilst the Fed and many other central banks insist on remaining hawkish, if inflation continues to improve quicker than expected, Fed members will reconsider their position.
Lastly, really shouldn’t forget about China, which suddenly abandoned its zero-COVID policy in December. Despite the large increase in infections and hospitalisations, the end of lockdowns sets the stage for a significant cyclical rebound in the Chinese economy – even with all of the other structural difficulties that Chinese authorities must address. Consider that many other countries had a similar post-lockdown resurgence (even the United Kingdom, despite all its other problems).
Investors will be looking for more clues about what will happen next. As markets remain slightly more positive through the end of the month, I expect many analysts’ perspectives to move as well. It will then be time to figure out if things are truly improving.