World – Macroeconomic scenario 2023-2024: changing nature

Although Russia’s economic collapse is not inevitable and the Ukrainians have put up an amazing resistance, the average scenario of a protracted war therefore seems, unfortunately, the most plausible. If until recently a positive surprise in the negotiations seemed unlikely, now it is more possible, but not so much as to constitute the preferred scenario.

Whether driven by demand or supply, whether exacerbated by violence or somewhat accentuated by the shock of the war in Ukraine, inflation is biting. Whether they are bold and almost complete or more hesitant and restrictive, monetary tightening “smells.” The powerful resources of the post-Covid recovery are draining and economies are set to flirt with varying degrees of imminent recession. If severe recessions appear to be avoidable, it is paradoxically due to the shock absorbers inherited from the pandemic, mainly still abundant personal savings and fairly resilient labor markets.

for United States of America, a soft landing cannot be ruled out. However, our scenario assumes a marked slowdown in growth from 2022 (to 1.9% after 5.9% in 2021) and a further slowdown in 2023 (to 0.5%) with a slight mid-year slowdown. is in favor of sharpening. Inflation is high and will only slow down gradually. The pillars that have kept sustained growth (especially consumption) at higher-than-expected levels are gradually disintegrating: a tight labor market but a slowdown in net job creation, high nominal wage growth but the loss of energy buy-backs due to the pandemic and the withdrawal of savings from borrowing. through credit cards, a downward trend in business inquiries, a slowdown in non-residential and residential investment. However, it is futile to hope for counter-cyclical action by fiscal and/or monetary policy: the Fed has made it clear that it is focusing on inflation at the expense of weathering short-term recession and mid-term elections. – The 2022 mandate was “born” into a divided power, which did not help any budgetary stimulus.

In the eurozone, the natural slowdown in post-pandemic growth is compounded by the new, more permanent shock of the war in Ukraine. The legibility of the economic situation becomes more complicated with the sequence of shocks: the traces of the past shock (temporary) coincide with the effects of the new shock (more permanent). What have we inherited from the pandemic? A still-firm job market, massive savings growth for the most modest households, inflation expected to be temporary. While the debate over the precise nature of inflation and the respective responsibilities of supply and demand remains unresolved, it is clear that strains on supply chains are easing, moderation in global inflation is spreading, but second-round effects are emerging: The contagion of rising energy prices through production costs is before any price-wage spiral is indicted. is also obvious. What does the war in Ukraine entail? In the nine months of 2022, compared to the same period of 2021, the increase in the price of energy imports is equal to 4.3 points of GDP. The dynamic effects of declining terms of trade, inflation and loss of competitiveness on export volumes and market shares will gradually unfold and add to this price. Our scenario therefore assumes a marked slowdown in growth (from 3.4% in 2022 to 0.1% in 2023), but a persistently weaker pace of expansion below subdued potential growth.

In Demon, with domestic demand finally catching up and growth unlikely to exceed 3% in 2022 (a far cry from the originally planned target of “around 5.5%), a shift to zero-Covid policy is quickly pleasing enthusiastic observers. It will be objected that his abandonment has not yet been registered by the authorities. It is also worth noting that the expected acceleration of growth to 5% in 2023 with zero net foreign contribution at best and investment still hindering the restructuring of the real estate sector, especially with the government’s 5% in 2023 It assumes that it can create a growth rate of up to %. enough of a confidence shock to release some of the prudential savings and stimulate consumption.

In terms of monetary policy, the priority is still to fight inflation. However, no matter how fast economies are in recession, central banks do not deal with inflation. They will not risk reducing their hedges too quickly, especially since core inflation may be more persistent than expected. The “pivot” that markets have been longing for will be a prelude to a sharp decline rather than a pause in quantitative tightening..

for United States of America, the Fed, which raised its target range to 4.25%-4.50% after aggressive rate hikes totaling 425 basis points in 2022, signaled its intention to slow the pace of hikes while making clear that tightening is far from over. It should continue in the first quarter of 2023 and bring the ratio to the target range Fed funds At the level of 5%-5.25%. A sustained return of inflation to the 2% target is a precondition for easing and will therefore not happen before 2024.

In the eurozone, the ECB also embarked on a path of monetary tightening and increased the deposit rate from extremely accommodative to restrictive levels. Once aggressive enough, the rate of growth will slow down and reach the terminal rate in March 2023, with the deposit rate below 3%. beginning” quantity density It will complete the system in 2023. Finally, interest rates and quantitative tightening are accompanied by changes in the terms of TLTROs that encourage banks to prepay these loans: this channel may be the most powerful channel for monetary tightening.

Inflation still unrelenting, determined monetary policies to combat it, recession looming: these are the key ingredients of the interest rate scenario.. The rise in long-term interest rates remains tied to growth prospects that are moderate at best or downright weak; this leads to an inversion of the curves modulated according to the degree of maturity of the economic and monetary circulation: clear in the USA, moderate in Germany. Therefore, our scenario projects US two-year and ten-year sovereign yields at 4.90% and around 4% at the end of 2023, respectively, and Germany at 3.10% and 2.60%, respectively .

Finally, after being supported by risk aversion, over-stimulated growth and early and strong monetary tightening in the US, the dollar is certainly done smiling. A recession in the US, even a slight and monetary pause, the worsening of America’s external imbalances, the overvaluation of the dollar, the importance of long positions and possible interventions in the foreign exchange market were intended to weaken it: The US currency is expected to give up a certain position in 2023.

Visit our publication World – Macroeconomic scenario 2023-2024: Unprecedented reversal of nature on 19 December 2022