Feature Stories | Dec 07 2022
2023 Outlook: Global
Is a global recession afoot? If so, how should investors position themselves for 2023?
-What is a recession really?
-Slow going for global economy
-Structural elements of inflation
-The new (old) normal
-Ongoing bear market
By Greg Peel
The problem with recessions is that you don’t know whether you’re in one until you have been. Today in Australia we’ll learn the result for the September quarter GDP – two weeks before the end of the December quarter.
The Australian economy grew 0.9% in the June quarter so there is no risk of recession, nor is a negative growth quarter expected in September. But had June seen GDP contraction and September proved to show further contraction, then the media would have a field day:
“It’s official: Australia In Recession!”
Or at least it was. If you accept the technical definition of two consecutive negative quarters. But nearly three months after the end of the second of those quarters, are we still in a recession? We could well be rocketing back out.
That’s what happened in 2020. The June lockdown quarter brought -7.0% GDP contraction, after a slight contraction of -0.2% in the March quarter which just caught the beginning of the lockdown. For the first time in 26 years, we were “in recession”. Then in the September quarter the economy grew 3.5%.
Delta lockdowns brought -1.8% contraction in the September quarter 2021, but the December quarter saw a swift 3.9% rebound. Inflation and RBA rate hikes have slowed the economy to a crawl in 2022, but not into contraction. Yet.
Of course, many scoff at the two-quarter technical definition anyway. The US economy contracted by -1.4% in the March quarter this year and -0.6% in June, and no one said “recession”. September saw a rebound of 2.9%.
In the US a recession is “officially” called by the National Bureau of Economic Research.
Officially, the NBER defines a recession as “a significant decline in economic activity that is spread across the economy and lasts more than a few months.” The bureau’s economists, in fact, profess not even to use GDP, the broadest measure of activity, as a primary barometer.
And they’re not exactly a bunch of Usain Bolts. The NBER declared the 2020 recession in July 2021.
So forget definitions. Probably the simplest definition of a recession is that if you feel like you’re in one, you are. And if people keep telling you a recession is coming, and you respond accordingly, it will.
And the two-quarter definition implies two sole GDP measures to decide the country is in recession. In the 2010s Australia did not see a recession, but we did see a “two-speed economy” – miners versus everybody else. For everybody else it “felt” like a recession, which basically means for everybody else, it was.
Another thing about recessions is they are typically not so predictable. Covid came right out of the blue, the GFC was slower moving but followed an unforeseen (by most) US property crash, the long seventies recession was led by unforeseen Arab oil shocks. Maybe the nineties recession was more predictable, given Volker had been trying his best to invoke one, hence it was “a recession we had to have”, but if the world, the US or Australia hits a recession in 2023, I think it would be the most pre-warned recession in modern history.
Which could mean one of two things.
There is a market adage that if everyone has the same view at the same time, the opposite will happen. That’s why, for example, market analysts place so much faith in “contrarian” indicators. On that basis maybe recession will be avoided.
But I just said the best way to cause a recession is to assume one is coming. Batten down the hatches dear, things might get tough. Stop spending now.
So we’ll probably see one next year. At this stage it’s the US, more probable, and for Australia, possible.
The world economy is set to slow, with Europe bound for an energy crisis-led recession, China to remain slow if it continues with zero-covid (but late indications suggest it won’t), and the US somewhat of a swing factor.
Recession(s) will be experienced because central banks will make them happen, just as Volker did, as the only means of combating inflation. If we have it, it will be another recession we had to have.
So with that in mind…
Morgan Stanley forecasts global growth to have slowed to around 3% in 2022, down from 6.2% in 2021, and fall to 2.2% in 2023. Growth will be uneven, with developed markets to be in or near recession, while emerging market economies should recover modestly.
Globally, inflation should peak in this December quarter, Morgan Stanley believes, before disinflation takes hold in 2023. Headline inflation will ease on general stability in oil prices and an improved global supply of food. Core inflation will see the effects of slowing demand and an easing of supply chain constraints, leading to lower consumer goods inflation, and slower growth, weaker demand and more normalised labour markets impacting on services inflation.
Developed market central banks will continue to tighten policy into restrictive territory and then stay there, plateauing throughout 2023, with the Fed holding on the longest. China and Japan are not worried nor overly impacted by inflation and will retain an accommodative stance.
Morgan Stanley notes however that there are risks to such a view. Another wave of commodity price shocks would lead to another temporary upside inflation surprise. A further increase of geopolitical tensions may again disrupt supply chains. Central banks may have to hike further.