2023 appears pivotal in three respects
Will inflation fall or, more precisely, how fast and how high? When and at what level will the central banks (led by the US Federal Reserve and the European Central Bank) stop raising their policy rates? How resilient will growth continue to be or will it sink in front of cumulative shocks?
Economists scarcely use the word 'certainty' when commenting on their forecasts. After all, economic activity is so complex, dynamic and subject to the unexpected that projections are often, if not always, surrounded by a high degree of uncertainty. Looking at 2023, the list of "known unknowns" is long. However, for the US and the Eurozone, there are also 'certainties', i.e. developments that are thought to be highly likely to occur.
(Much?) less inflation
The first of these certainties is lower inflation (or disinflation). Inflation should indeed fall mechanically in 2023, possibly significantly, thanks to the reduced contribution of energy and food prices. The easing of tensions in supply chains and the reduction in demand - which will weigh on the pricing power of companies - should also help to bring inflation down.
End of monetary tightening
The second certainty is the end of monetary tightening, i.e. we expect central bank policy rates to peak. In 2022, the surge in inflation and the beginning of a rise in inflation expectations justified the forced rise in interest rates. The pace and extent of monetary normalisation has thus been faster than in previous cycles: this implies that the terminal rate will also be reached more quickly. The level reached at the end of 2022 and the first signs of disinflation combined with fears of a recession also suggest that the upward cycle will soon come to an end.
(Much?) less growth
Finally, a recession in the eurozone seems inevitable, under the weight of the shocks and the energy crisis in particular, the full effects of which have not yet been seen. We expect three quarters of slightly negative quarterly growth from the fourth quarter of 2022. At the end, the survey data already shows a level corresponding to a contraction in GDP.
In the United States, we expect a recession of the same duration and limited scope, but only from the second quarter of 2023, largely due to the delayed effects of monetary tightening. This recession already clearly appears in US leading indicators decline. Fiscal support measures, recruitment difficulties conducive to labour hoarding, the urgency and scale of investment needs in the energy transition are the main reasons why we expect a recession on this side of the Atlantic, as on the other, to be limited in scope and duration.
Multiple uncertainties
These "certainties" are, however, accompanied by a multitude of uncertainties and downside risks, foremost the evolution of the war in Ukraine and its possible repercussions on the global economy.
Another uncertainty concerns inflation, as risks continue to be on the upside (effects of past price increases, wage dynamics) and disinflation may be less extensive than expected. If this were to be the case, it would raise the end point of policy rates anticipated by investors and central banks. This would weigh on financial markets but also on household and business confidence, purchasing power and margins, and thus on demand and employment.
The housing markets are yet another point of weakness as they could increase the duration and depth of the recession. Central banks face a major challenge: they must calibrate monetary tightening correctly (neither too much, so as not to harm growth too much, nor too little, so as to curb inflation as quickly as possible). If, in our central scenario, we assume that they meet this challenge, the risk of error is not negligible.
Last but not least, in the euro area the evolution of gas prices is another key risk factor as the replenishment of stocks for the coming winter could lead to a further price surge.
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