RECESSION, INFLATION, UKRAINE, CHINA, MONETARY POLICY... 2023 AS SEEN BY JEAN-CHRISTOPHE CAFFET, COFACE CHIEF ECONOMIST
Wansquare asked a panel of economists and business leaders for their forecasts for 2023. Here is what our chief economist Jean-Christophe Caffet had to say.
WHAT IS YOUR OUTLOOK FOR THE GLOBAL ECONOMY? HAVE YOU DEVELOPED SEVERAL SCENARIOS DEPENDING ON HOW THE WAR IN UKRAINE DEVELOPS?
The consequences of the war in Ukraine are severe and, in principle, lasting. However, they took longer than initially expected to have an impact on global economic growth, despite the acceleration of inflation caused by the sharp rise in commodity prices, particularly energy. With the exception of China, 2022 will therefore have been a much better year than we had feared in the days following the invasion of Ukraine. There are three main reasons for this discrepancy, if not in forecasting, then at least in the timing of the estimated effects of the conflict: the post-pandemic rebound that is still at work and the rapid reopening of many economies after the Omicron wave; the quasi-continuous attenuation, from then on, of disruptions to global value chains, despite the Chinese confinements of the second quarter; and the strong dissaving of agents, especially households - with the reserves accumulated during the pandemic acting as a cushion.
The emergency measures taken to deal with the energy crisis, particularly in Europe, have also played their part in preserving activity and, to some extent, social stability. But all these elements cannot play out forever, and the outlook for 2023 is gloomy, to say the least, regardless of how the conflict in Ukraine develops. We expect global growth to be below 2% next year, compared to an average of more than 3.0% over the last ten years.
IS A RECESSION INEVITABLE IN EUROPE IN THE COMING MONTHS? AND IN FRANCE?
A recession in Europe seems quite possible, if not highly probable, at the turn of the year. In fact, we are probably already in a recession, judging by the latest available statistics and recently published leading indicators. Nevertheless, we should avoid a sharp contraction in activity, with growth only slightly negative in the fourth quarter of 2022 and the first quarter of 2023. In short, the worst-case scenario of a severe recession due to a physical energy shortage has been avoided thanks to massive purchases of liquefied natural gas (LNG) throughout the year and particularly warm temperatures during the fall. This allowed Europe to enter the winter with high natural gas stocks and to see its prospects brighten in the very short term. The same is true for France, which should be relatively less affected than its larger neighbors if the situation were to deteriorate more sharply, due to its lesser dependence on natural gas on the one hand, and its more limited industrial base on the other.
SHOULD WE WORRY ABOUT A DECOUPLING BETWEEN THE US AND THE EUROZONE?
In the short term, i.e. over a 9-12 month horizon, we cannot really talk about a decoupling between the US and the Eurozone. Both economies will indeed slow down significantly and simultaneously. A recession cannot be ruled out in the United States either, although we expect growth to be significantly higher than in the Eurozone over the whole of 2023. In the longer term, however, we must be concerned about a decoupling between the two currency zones for all the reasons that existed before the current crisis and that remain (demographics, innovation, productivity, etc.), to which we must now add a differential that is in principle sustainable in terms of energy prices and even access to resources. If the authorities on both sides of the Atlantic do not address the problem, this decoupling will have massive repercussions on global (geo)political, economic and financial balances.
ARE YOU CONCERNED ABOUT THE CHINESE ECONOMIC SLOWDOWN?
One of the main uncertainties for 2023 concerns the Chinese macroeconomy. The consensus view, which we subscribe to more by assumption than by pure conviction, is that China's economy will rebound strongly once the current boom is over. But the challenges facing the Chinese economy are many, not least of which in the short term is the crisis in its real estate sector - which will not be resolved with the measures recently announced by the authorities. What worries me more is the scenario of a strong Chinese rebound in the second half of the year, as this would considerably complicate the rebuilding of European natural gas stocks. Let's not forget that this was made much easier this year by a drop of about a quarter in Chinese LNG purchases. It is one thing to build regasification terminals in Europe, but it is quite another to bring new liquefaction capacity on stream: in such a scenario, those that come on stream in 2023 will clearly not be sufficient to meet all the demand…
HAS THE CURRENT INFLATION, WHEREVER IT COMES FROM (RAW MATERIALS, MULTIPLE SHORTAGES, WAGE INCREASES), PASSED ITS PEAK?
Inflation has peaked in the US, where it has now been falling for several months. The same is likely to be true in Europe, where inflation is expected to fall significantly in the first half of the year, for simple arithmetical reasons - base effects on energy in particular. Finally, the situation is more mixed in the emerging countries, as often.
The question now is not whether inflation will fall, but how far. Excluding energy and fresh food, so-called core inflation is not falling, or only slightly. Given the evolution of wages - admittedly negative in real terms - and the slowdown in productivity, there is little chance that inflation will return to its target by the end of 2023. Unless, of course, the global economy goes into recession and commodity prices fall with it, which is not our central scenario. On the contrary, we could instead see a rebound in inflation in the second half of the year, with significant consequences for the conduct of monetary policy.
WHAT INFLUENCE WILL THE CENTRAL BANKS' MONETARY POLICIES HAVE ON THE REAL ECONOMY AND THE FINANCIAL MARKETS IN 2023?
The lags in the transmission of monetary policy to the real economy are such that the effects of the tightening in 2022 have yet to be seen for the most part. For this reason, central banks will certainly pause next year, or significantly slow down the pace of monetary tightening, which is unprecedented in over 40 years. This does not mean that they will remain inactive and/or that they will have no influence on either the real economy or the financial markets, but that their impact on the former is a function of what they have already done, while on the latter it will depend on what they do - and therefore on the evolution of inflation.
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