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Manulife InvestChoice – 2023 Q1 Global Market Outlook

January 2023

Quarterly Macro Outlook

As we consider the year ahead, we expect to see a game of two halves, where challenging conditions will prevail in the first half before improving through the second half. The aggressive pace of monetary tightening and its associated lagged effects should drive a synchronised global growth downturn in the first half.

 

We expect global growth to slow materially and come in substantially lower than the below 3% threshold that the International Monetary Fund uses to define global recessions. A downturn of this magnitude—excluding the COVID-19 shock and the global financial crisis—could make 2023 the worst year for global growth since the 1980s. We expect the economic slump to become more apparent in the first half of the year, with a cyclical bottom only occurring in Q2/Q3.

 

Our analysis shows that most advanced economies are likely to experience a recession in the year ahead. Given that the U.S. Federal Reserve (Fed) has been hiking rates at the fastest pace in decades, the U.S. economy will be facing the lingering effects of substantial policy tightening, with real rates rising while inflation eases gradually.

 

Economic weakness will be particularly pronounced in interest-rate-sensitive economies such as Canada, Australia, New Zealand, and the United Kingdom—these economies would almost certainly be confronting downside risks as a result of spillovers from their respective weaker housing markets. In Continental Europe, the growth drag will predominantly stem from particularly large negative terms-of-trade shocks.

 

Meanwhile, slowing final demand from advanced economies, elevated inflation, and a still-strong U.S. dollar (USD) will likely morph into material headwinds for growth in emerging markets (EM). In mainland China, a bumpy exit from zero-COVID policy, weak external demand, a still struggling property sector, and insufficient policy support look set to extend the country’s below-trend GDP into 2024. That said, the prospects for the rest of Asia’s economies are a little more mixed: We expect weak foreign demand to weigh on export growth, but North Asia is particularly vulnerable in light of a likely inventory overhang. On the other hand, weakness in ASEAN countries will likely be cushioned by a strong reopening bounce and relatively healthy household balance sheets.

 

Amid a macro backdrop characterized by elevated global inflation, uncertainty over when Fed rates might peak, and rising odds of a global recession, the first half of 2023 could bear witness to a series of sharper—and longer—bouts of market volatility. Thankfully, the picture does brighten slightly in the second half, during which these headwinds are likely to moderate, ushering in more conducive conditions for financial markets.

US: Monetary policy will likely—once again— be a dominant theme, with markets in search of peak fed funds rate and its timing.

We expect the United States’ economic outlook to get progressively brighter as the year ahead progresses. 2023 is likely to begin with the United States staring down a recession as the cumulated lagged effects of 2022’s monetary policy tightening take their toll on the consumer, employment, and manufacturing activities. Typically, we could have expected fiscal support to cushion the blow, but government spending is also likely to be a headwind to growth within the context of the scale of pandemic relief; a split Congress also makes further material stimulus unlikely. Monetary policy will likely—once again—be a dominant theme, with markets in search of peak fed funds rate and its timing. We expect rates to hit a peak range of 5.00% to 5.25% in March. Beyond that, the focus should shift to the likely timing of the first possible interest-rate cuts, which we believe will take place in Q4 as employment and inflationary pressures weaken enough to justify easier policy.

Asia-Pacific: The good news is that the reopening of the region’s economy and a continued recovery in international arrivals should provide support to growth in established tourist destinations.

It will be difficult for the region to escape the downdraft of a global recession. Consumer spending will also likely be restrained by the recent aggressive interest-rate hikes and elevated inflation. Early signs of a slowing in economic activity were notable in Manufacturing Purchasing Managers’ Indexes (PMIs) for November, which fell further into contractionary territory across the region, driven by a sharp decline in the employment index; in addition, there are signs pointing to slowing export growth. The good news is that the reopening of the region’s economy and a continued recovery in international arrivals should provide support to growth in established tourist destinations, most notably Thailand. Meanwhile, headline inflation seems to have peaked in many economies and is likely to drop further over the coming months as transport and energy price inflation continues to ease. We also expect central banks in the region to begin to shift their focus from containing inflation to supporting demand. We think most tightening cycles will come to an end around Q1 2023, and we expect some central banks to start cutting interest rates before the end of 2023.

Euro area: The continued challenge for the euro area is the currency bloc’s inflation outlook as policymakers keep a watchful eye on ongoing wage negotiations and their implications for broader price pressures.

The deterioration in the euro area’s economic outlook appears to have stabilized, with expectations of near-zero growth in 2023 followed by a modest expansion in 2024. While the outlook remains disappointing, recent stabilization has delivered a meaningful recovery in European equities on both an absolute and relative basis. We believe the European Central Bank (ECB) will hike an additional 100 basis points (bps) through Q1. While the central bank's tightening cycle has so far avoided a worrisome widening in sovereign yield spreads, markets remain attentive to balance sheet developments as the ECB looks to begin QT in early 2023. The continued challenge for the euro area is the currency bloc’s inflation outlook as policymakers keep a watchful eye on ongoing wage negotiations and their implications for broader price pressures. Investor concerns about the energy crisis appear to have moderated, but we remain alert to secondary developments and knock-on effects as they relate to political risk.

Disclaimer – Quarterly Macro Outlook

Manulife Investment Management is the global wealth and asset management segment of Manulife Financial Corporation. The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable but Manulife Investment Management does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein. Neither Manulife Investment Management or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein.

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