The global economy breached $100 trillion for the first time in 2022 but will stall in 2023 in the backdrop of policymakers continuing their fight against inflation, according to the Centre for Economics and Business Research.
The world faces a recession in 2023 as higher borrowing costs targeted at tackling inflation cause a number of economies to contract according to the British consultancy,
“It’s likely that the world economy will face a recession next year as a result of the rises in interest rates in response to higher inflation,” said Kay Daniel Neufeld, director and head of Forecasting at CEBR.
“The battle against inflation is not won yet. We expect central bankers to stick to their guns in 2023 despite the economic costs. The cost of bringing inflation down to more comfortable levels is a poorer growth outlook for a number of years to come,” the report added.
The Fed is believed to monitor the inflation gauge in the consumer spending report, called the personal consumption expenditures price index, even more closely than it does the government’s better-known consumer price index. But whether a projected half-percentage point decline would move Fed policymakers to soften their stance on future rate hikes remains to be seen.
In line with the consultancy’s stance, the market remains awash with expectations of a recession while hopes of a soft landing have started losing momentum. Prominent names have argued in recent times that a recession may be inevitable.
“Historically, when you have high inflation, and the Fed is jacking up interest rates to quell inflation, that results in a downturn or recession,” said Mark Zandi, chief economist at Moody’s Analytics and author in a recent media interview,. “That invariably happens — the classic overheating scenario that leads to a recession. We’ve seen this story before. When inflation picks up and the Fed responds by pushing up interest rates, the economy ultimately caves under the weight of higher interest rates.”
While the rate was much lower than in the U.S. and most major European and emerging economies, it adds to pressure on the Bank of Japan to adjust its own policies that have kept interest rates ultra-low to spur growth. For Japan, deflation — falling prices — rather than inflation has been the key concern for most of the past few decades. Recession in coming months remains the greater concern, economists say.
Those higher rates are already taking a toll on the housing market, with home sales down 35.4% from last year in November, the 10th month in a row of decline. The 30-year mortgage rate is close to 7%. And consumer inflation was still running at a hot 7.1% annual rate in November.
“You have to blow the dust off your economics textbook. This is going to be be a classic recession,” said Tom Simons, money market economist at Jefferies. “The transmission mechanism we’re going to see it work through first in the beginning of next year, we’ll start to see some significant margin compression in corporate profits. Once that starts to take hold, they’re going to take steps to cut their expenses. The first place we’re going to see it is in reducing headcount. We’ll see that by the middle of next year, and that’s when we’ll see economic growth slowdown significantly and inflation will come down as well.”
The SPDR S&P 500 ETF Trust (NYSE: SPY) lost 0.15% in the last five days while the Vanguard Total Bond Market Index Fund ETF (NASDAQ: BND) shed 1.19% in the same period.
The findings by the consultancy are more pessimistic than the latest forecast from the International Monetary Fund, according to the Bloomberg report. That institution cautioned in October that over a third of the world economy will contract and there is a 25% chance of global GDP growing by less than 2% in 2023, which it defines as a global recession.
Ironically, the Fed is slowing the economy, after it came to the rescue in the last two economic downturns. The central bank helped stimulate lending by taking interest rates to zero, and boosted market liquidity by adding trillions of dollars in assets to its balance sheet. It is now unwinding that balance sheet, and has rapidly raised interest rates from zero in March — to a range of 4.25% to 4.5% this month.
But in those last two recessions, policymakers did not need to worry about high inflation biting into consumer or corporate spending power, and creeping across the economy through the supply chain and rising wages.
Produced in association with Benzinga.
