Global economics: five big themes for 2023

Inflation and geopolitical tensions continue to impact global economies, we delve deeper to look at what other factors will influence markets.

Written By:

Flora Harley, Knight Frank

06 Feb 2023

4 minutes to read

Categories: Topic Economics

In January we released our Outlook 2023, where we examine our five big themes for our 2023, as part of The Wealth Report series. Below are some of the key findings we predict to have an affect on economies this year.

1. Rate of inflation

The rate of inflation will dictate when central banks can end the current cycle of rising interest rates. The results will reverberate through borrowing costs and global asset prices.

Two-thirds of our Attitudes Survey respondents cited inflation as the biggest risk for their clients’ ability to create and grow wealth in 2023 – interest rates were cited by just under 60%.

Peak inflation appears to have been in 2022 as the US’s headline rate cooled further to 6.4% in January from a high of 9.1% in June. In the UK the peak seemed to be later in October, with the effect of energy price caps, and has cooled from 11.1% to 10.1%. Energy prices have cooled globally. In part thanks to a mild winter natural gas prices are back at where they were at the outset of 2022, a fifth of the peak. Supply chain pressures have eased and with China abandoning the zero-Covid stance the potential for future disruption is lower.

According to the IMF global inflation is expected to fall from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024.

2. Reset opportunities

There will be opportunities to reset as we enter a new investment environment, despite recessions across many major economies. Consensus being that we will see interest rates peak in the first half of 2023 and potential cuts at the end of the year. However, we will not see rates back to the ultra-low levels experienced since the Global Financial Crisis.

The Federal Reserve slowed their hiking pace in February, opting for 25bps (the slowest since March 2022) where the ECB and Bank of England implemented 50 bps hikes, a step down in pace from the latter half of 2022 but reflecting the stickier inflation on this side of the Atlantic. Currently market expectations are for a peak of 5%, 3% and 4.5%, respectively.

Economic downturns are already evident. However, the mood music has shifted in 2023 – The IMF began the year by revising their forecasts up, they expect global GDP to grow by 2.9% this year, 0.2 percentage points higher than in October. Alongside the IMF, the most recent Consensus Economics forecasts predicted that the euro zone too will avoid recession. There is a lag as the impact of higher rates works through economies and it’s not certain they will stop hiking but there is optimism for 2023.

3. Real estate

Real estate was the top cited opportunity among our Attitude Survey respondents, with 46% citing it, many are seeking diversification and a hedge against inflation. Residential and commercial property are both in the spotlight. Higher interest rates will temper demand for residential property in 2023. Some 15% of UHNWIs are looking to purchase a residential property this year, down from 21% in the previous year’s survey.

4. Geopolitical tensions

Tensions in 2022 were dominant and will continue to weigh on sentiment through 2023. Many will be familiar, but there will undoubtedly be surprises. The on-going war in Ukraine does not have a defined path and still offers a lot of unknowns. Energy markets – as mentioned earlier – have quietened and oil is around $80 a barrel from over $120 last year. If we see renewed offensives though, this could have significant effects.

5. The big three

China

The reopening of the Chinese mainland, dubbed the economic event of 2023 by The Economist, will offer a boost to global growth and was a primary reason for the IMF’s upgrade. After two years of strict zero-Covid policies, the government reopened the Chinese economy and international travel resumed on 8^th January 2023 after 1,016 days of closed borders. It was confirmed that the economy grew by 3% in 2022 the slowest since the 1970s. They have set the target at 5% for 2023.

India

This year India will overtake China as the world most populous country and will be among the fastest growing countries. This may have already happened as it was confirmed China’s population shrank in 2022 for the first time in 60 years. The Indian economy is the fifth largest in the world after displacing the UK in 2022 and is pipped to be one of the fastest growing this year with 7% growth forecast.

US

The agility of the US economy will be evident, some 11% of our survey respondents cited the US as an opportunity to grow wealth, and they may yet avoid recession. There is a lot of optimism for the US and US based assets, not least for currency benefits but due to the safe-haven status during volatile times. With the perception of peak inflation and potential reversal of rates at the end of 2024, equity markets are up 4-5% the past quarter.