In this note, we highlight ten general thoughts on the global and South African (SA) economy as we move into 2023. Over the next year, we expect slower global economic growth to dominate the agenda. A recessionary-like environment can be expected across developed markets (DMs), with more divergence in economic activity for emerging markets (EMs). As such, our base case is for softer and more volatile commodity prices as global economic growth slows. A global shift in monetary policy, to either pause or slow down the pace of interest rate hikes in 2023, will largely remain a function of inflation which is broadly expected to ease — especially towards the latter part of 2023. Consequently, central banks are likely to shift their tone from arresting inflation to supporting growth. Meanwhile, Russia’s war on Ukraine remains a key geopolitical risk that does not appear to be abating anytime soon. The effects of sanctions against Russia and their disruptive nature on oil prices and broader supply chains continue to dampen the economic outlook. The current European Union (EU) ban on Russia’s seaborne crude oil and the expected ban on imports of refined oil products from Russia in 1Q23 are some challenges that will add volatility to the energy market. On the back of this, we caution that the effects of a global slowdown, combined with a higher interest rate environment, will continue to weigh on financial markets.
As such, investors are probably eyeing 2023 with much trepidation after what turned out to be a rather painful 2022 for bonds and stocks alike. A bumpy ride appears to be on the cards for this year, not counting any other idiosyncratic events that are yet to make a (potential) appearance. Whilst it is always hard to say where surprise events might pop up, below, we highlight ten possible factors/events (in no particular order) worth taking note of as we shift into gear for the new year.
1. Global food price pressures will continue to ease
Food price inflation remains a focal point for investors at the start of 2023, given its impact on inflation and global monetary policy last year. In 2022, high food prices were one of the main drivers of inflation, so lower food prices will naturally be welcomed. The slowdown in economic growth is expected to force consumers to cut back their demand, which will likely keep food prices in check. Factors such as intensifying geopolitical tension between Russia and Ukraine could keep food prices elevated over the foreseeable future.
2. US inflation and the Fed will continue to dominate discourse – but to what end?
US inflation appears to have peaked in June 2022, with the consumer price index (CPI) providing a good reason to believe that we are now at the beginning of a downward trend.
3. A possible shift in Japan’s monetary policy
2023 will likely see a significant shift in Japan’s monetary policy as the Bank of Japan (BoJ) Governor Haruhiko Kuroda leaves office in April, having been regarded as extremely dovish during his decade at the helm.
4. A potential rout in the global property sector?
Another area that we highlight as a possible cause of concern for 2023 is some form of financial stress in the global property sector.
5. Europe has seemingly survived the largely expected energy crises
For Europe, the key risk is less about a housing bust and more about energy supply, given that Russia (the now former supplier of 40% of Europe’s gas) stopped the bulk of its supplies this past summer.
6. China to open post-COVID-19, easing global supply chain pressures
After a year of domestic economic volatility and international turmoil, China is expected to focus on economic growth this year, which means the country will further deepen reform and expand opening-up.
7. A year of (potential) political stability
2023 may hopefully prove to be a more stable period in global politics than we have grown used to in recent years.
8. Reluctant trade partners: A slowdown in globalisation?
Several lines were crossed in 2022 concerning the international trade arena, primarily due to Russia’s invasion of Ukraine. As such, 2023 is a year where countries may test new ways to weaponise their economic advantages via trade.
9. Labour markets will likely soften
While the unemployment rate remains low and job growth is still healthy in the US, demand for labour may now be past its peak. Both the job openings and the quits rates have declined, albeit to elevated levels.
10. The SA political economy: President Cyril Ramaphosa survived a deeply fractured ANC in 2022
No one will disagree that 2022 was an arduous year for SA, politically and economically. As a political institution, the ANC remains in a state of deep internal unease – with ongoing implications for the broader political economy. However, it is not all doom and gloom – the outcomes of the top seven and National Executive Committee (NEC) votes from the December conference provide a far more conducive basis for navigating these various challenges.
All being said, the above factors are just mere musings/considerations on our part, and the above list is not mutually exclusive or exhaustive. At the end of the day, 2022 has, if anything, taught us that there is always the risk of some new idiosyncratic event popping up. Whilst it is impossible to make provision for such unexpected events, investors should remain cautious of negative surprises when the global economy is so vulnerable and central banks cannot yet ease rates, making these unexpected events more potent than usual.
Adapted article by Casey Delport, Investment Analyst – Anchor Capital