Konoplytska
By Eric Winograd
With a tough 2022 on the books, looking back shows a year defined by inflation. Financial markets, investors and policy makers also in many financial sectors fell on higher prices and incomes. meaning growth and prices.
We expect 2023 to be different—a year of change. Inflation will continue to dominate the headlines, perhaps for months to come. However, our confidence is growing that inflationary pressures will start to subside, which will lead investors and policymakers to change their outlook on economic growth. The change will indicate a return to the normal position, although the rise will be inconsistent.
All Eyes on the Risk of a Recession in 2023
Any sensible discussion of the coming year starts with inflation – it’s still very high, and until the fall nothing will matter. Based on our analysis, we are confident that inflation will decrease in the next few months, with the speed and extent of this decrease determined by the exposure of each economy to the main components of the inflation basket:
Inflation has started to slow down. At the start of the COVID-19 pandemic, commodity prices soared as the global supply chain spiraled into disarray. At the peak in early 2022, US commodity prices rose nearly 20% year over year (Show it). With the retail chains now heavily regulated, prices have fallen over the past few months.
With Supply Chains Smoothed, Commodity Prices Fall
Year-to-Year Changes in U.S. Fixed Income Prices
Past events do not guarantee future results.
Until November 30, 2022
Source: Refinitiv DataStream and AllianceBernstein (AB)
Property prices have also fallen from their peak—a trend we expect to continue—helping to moderate inflation. Europe has a major role in the correction, as the rate of inflation for 2022 was driven by the increase in the price of natural gas following the Russian invasion of Ukraine. A mild start to the winter and natural gas reserves could help lift Europe’s inflation—currently around 10% year-on-year—down sharply in the coming months.
Decreasing the house downfall is possible by summer. In the US, commodity prices only make up 25% or so of the inflation-adjusted basket; he takes the lead role. The post-pandemic rise in house prices should continue to fuel inflation for several months, making inflation more difficult. But we are confident that the drop in prices we have seen since spring will bring those numbers down – some relief should come by summer.
Depreciation rates for non-residential properties continue to rise. Wages are the main driver of non-housing inflation – a metric that has influence on US and European prices. Wages are a major cost factor in many labor-intensive industries, as evidenced by the strong correlation between wage growth and employment.Show it). It is not surprising that the benefits received from the end of 2021 will raise the level of employment.
Falling Wages and Jobs Have Been Closely Correlated
Year-to-Year Change in Wages and Employment Percentage Change
Past events do not guarantee future results.
Wage trends are represented by the Atlanta Fed Wage Tracker. The decline in service prices is represented by the Services Consumer Price Index Until November 30, 2022
Source: Refinitiv DataStream and AB
This is where things get difficult for many central banks. To slow wage growth, they will need to tighten policies to slow economic growth – or lead to a recession. Despite the big increase in 2022, there is no evidence that this strategy is working. Labor markets remain very tight in many developed countries, with unemployment near a temporary low (Show it).
Labor Markets Remain Tight Across the Developed World
Unemployment rate (percentage)
Past events do not guarantee future results.
Until December 31, 2022
Source: Refinitiv DataStream
Tight labor markets, more than any other issue, will force central banks to continue raising rates. We don’t believe that wage growth will slow down as much as we want it to in other parts of the basket, but monetary policy works in the long run. The first run of the trip was nine months ago, and we don’t think the results have been felt yet. Therefore, we do not think it makes sense to abandon the idea of minimum wages, and thus soft inflation, going forward.
Interest Rates Have Undoubtedly Fallen Recently
However, the wait will be difficult. Until employment weakens, the changes we expect in 2023 will not materialize – central banks may be hawkish. As the softening of jobs becomes apparent, financial markets will change dramatically in economic growth. The best news could not be further ahead: we are forecasting a recession in both the euro area and the UK, and slower growth in the US in 2023.
In many cases, such weak growth would lead to a reduction in the economic policy, but this is not in the cards for 2023. Inflation will gradually cool down and stop, and fully align to the objectives of the rise of things that are not possible. This is why we think that central banks will move more slowly than the financial markets seem to be doing. The result: by the middle of the year, growth should be slow or negative but prices are still high and stable. If rate cuts are to happen, they won’t be until the end of this year or until 2024 or beyond.
Asia Is Doing Itself-On Both Sides
While the major economies of the West are on the same path – albeit at different speeds – the major Asian countries are on a different journey.
In Japan, inflation has started rising fast enough to attract the attention of the Bank of Japan (BOJ). The level of policy is still negative, and the control of productivity remains active. We expect everything to change in 2023, which is why the BOJ will be moving towards tighter policy as the Fed, European Central Bank and Bank of England are moving in a different direction. The BOJ’s move should reverse some of the yen weakness we saw in 2022.
China, too, is in a different cyclical position. Restrictions on the movement of the epidemic will reduce the growth of 2022, and the beginning of 2023 may be weak, also, because the restrictions are reduced and the disease can spread more. The trend has put China’s central bank on track to ease monetary policy, especially in the first half of the year.
Expect a Choppy Year in the Financial Markets
What does all this mean for investors? The good news is that 2023 probably won’t be as difficult as 2022. Even if inflation slows this year, it will take the edge off interest rates, especially since we think inflation will end in the first few months. a year. The end of travel should provide some relief to the stock and bond markets.
But it is still a long way from making it clear. A country with slow or erratic growth and austerity policies is a serious economic problem, so expect a very difficult year. Markets will rise when inflation falls rapidly and increase expectations of further inflation. But markets will also stumble when inflation slows—or when central banks push back on the idea of easing. Expect that “good-news, bad-news” trend to push on and on in 2023.
We see a very positive environment by 2024, with inflation well under control and policy makers looking to stimulate growth. This makes 2023 a transition year from the crisis of 2022 to a more positive environment that we hope to see several episodes from now. However, changes can be difficult – 2023 may be better for the market than 2022, but the rise will not be smooth.
The views expressed here do not constitute research, financial advice or business opinion and do not necessarily represent the views of the entire AB portfolio management team and may be reviewed over time.
Original Note
Editor’s Notes: The bullet points for this article were selected by the Seeking Alpha editors.
