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Uncertainty remains, yet economists look to the future with optimism. The IMF now expects the world GDP to grow 2.9% in 2023, and then rise to 3.1% in 2024. The US Treasury Secretary is feeling better about avoiding a recession and getting the economy to a soft landing.
On the inflation side, the picture is somewhat different. Even though consumer prices are expected to fall from 8.8% in 2022 to 6.6% in 2023 and 4.3% in 2024, in practice, things could get worse. China’s “reopening” and the strength of the labor market (517,000 new jobs were created in January and unemployment fell to 3.4%) could “fuel” PCE in the US.
Thus, despite the optimism, financial stability risks remain elevated. Moreover, if central banks continue to talk a hawkish message, a recession could still be brewing. Judging by recent earnings conference calls and a wave of layoffs, the corporate sector is already getting ready for the worst.
The fact that the Bank of Canada has announced a pause in tightening policy after raising rates to 4.5% makes little difference. Last week’s Fed meeting was proof positive of that. According to Jerome Powell, there is still a long way to go before a return to price stability, which is why monetary policy will remain contractionary for some time.
Globally, core inflation remains stubbornly high in most regions. In addition, labor markets remain tight, while energy prices remain under pressure. IMF analysts believe that “risk assets could be significantly punished if earnings contract further or if investors reassess their outlook for monetary policy based on central bank communications.”
Looking forward, financial market volatility is expected to remain elevated and could be exacerbated by tight market liquidity. The good news is that should the situation worsen, the Fed could end tightening sooner than expected.
