January 02, 2023 (MLN): 'May he live in interesting times' is a Chinese proverb that many of us have heard, perhaps a little too often in recent times. The list of unprecedented crises gets longer by the year. And indeed, many of this year's issues strike all shades of recession.

This is not the moment to identify potential new black or grey swans… nor even pink ones. The predictions and calls for 2023 reflect our base case: median forecasts backed by this year’s events and assumptions, a report by ING Think Economic and Financial analysis revealed. 

CY22 was supposed to be the year of post-pandemic and post-lockdown re-openings. But it became the year of the war, inflation, energy, commodity price crises, drought, and floods. It was also a year that saw a paradigm shift at major central banks, trying to fight inflation at all costs.

Central banks got all of us used to jumbo-size rate hikes and, at least in the US, the policy rate is almost back at levels last seen prior to other financial crises. Moreover, Inflation will continue to be one of the key themes of 2023 as stated in the report.

 In the eurozone, inflation could turn out to be stickier than the European Central Bank would like and also perhaps afford.

Still, with interest rates entering restrictive territory in early 2023, the looming loss of economic wealth, and a large need for investment, the bank will be forced to stop earlier than it perhaps might like.

Or, alternatively, it could commit a policy mistake if it hikes rates far beyond mildly restrictive levels.

However, with retail sales falling sharply in October a recession over the winter quarters still looks very likely, albeit perhaps not as deep as we previously penciled in. 

Thereafter, growth will be subdued at best, as higher interest rates will start to bite, energy prices are likely to remain at elevated levels, while a budgetary stimulus is bound to peter out in the course of 2023.

In Addition, the headline inflation might fall back in November to a still high 10%, while underlying inflation remains stuck at 5%. The ECB is therefore likely to lift the deposit rate to 2% in December, considered by some members of the Governing Council as the neutral rate.

The first quarter might see another 50 bp further tightening, as well as the start of a gradual reduction of the balance sheet, though at a very slow pace in the beginning. 

Similarly, the biggest narrative for 2023 will be one of the big falls in market rates. Arguably, financial conditions (especially in the US) are prone to loosening too much, driven there by falls in market rates. The Fed and the ECB will peak in the first quarter, and once there, market rates will have a carte blanche to anticipate future cuts.

Generally speaking, manufacturing firms across developed markets are reporting lower orders and rapidly rising inventory levels. Coupled with lower input prices for many commodities and also shipping, this points not only to lower inflation but also potentially to outright price falls in some durable goods categories; we already see that with used cars.

"We believe that the high share of shelter and used cars in the inflation measure (more than 40% of the basket) could push down headline inflation faster than many policymakers currently expect," the report added. 

In the eurozone, however, headline inflation could prove to be a bit stickier, certainly if our house view is correct and gas prices stay high into winter 2023. As a consequence, headline inflation will just gradually come down and will only reach the ECB’s 2% target in 2024.

Market rates are projected to fall significantly in 2023. And it is considered a tough year for the European natural gas market in order to meet the demands prices will have to remain at elevated levels. We forecast TTF to average €175/MWh over 2023.

Global trade entered the slow lane at the end of 2022 and will continue to face headwinds in the new year. 

As a call for 2023, we look for the curve to dis-invert completely. "This reflects our view that sees the Fed cutting rates by the second half of 2023 to help cushion the economy once inflation has been tamed," it noted. 

Copyright Mettis Link News

Posted on: 2023-01-02T17:05:32+05:00