Page 6 - ISQ Outlook 2023

INVESTMENT STRATEGY QUARTERLY

2023: A Year Of Two Halves For Developed Markets

Jeremy Batstone-Carr, European Strategist, Raymond James Investment Services Ltd*

Boosted by a slight lessening in the headwinds ever A comparatively shallow recession is our base case scenario for
present throughout 2022, developed market equities early 2023, followed by a relatively swift recovery thereafter.
There is, however, no room for complacency; the risks are
staged a strong revival as the northern hemisphere skewed towards a deeper and more protracted downturn.
autumn slipped into winter. U.S. stocks rallied but still It will be the developed economies that will deliver the largest
underperformed their European counterparts in common peak-to-trough falls in real GDP, with the U.K. and Europe hit
currency terms as exchange rate effects associated with a disproportionately hard. But this is an unusual economic cycle
reversal in the U.S. dollar’s earlier strength played a major and very unlike those of the recent past. Potential GDP growth
role in performance. The stock market rebound is at odds has slowed over time, and a given fall or slowdown in GDP
growth will thus have differing implications for the degree of
with the inversion in the sovereign bond yield curve. Not spare capacity in an economy (or the size of the output gap)
only is the Treasury curve significantly inverted, but the and, by extension, inflation and the policy response.
global government bond curve in the closely watched
2-year / 10-year segment has done the same. The message GLOBAL INFLATION WILL DISSIPATE IN 2023
from the developed bond market is that the global Inflationary pressures are thought likely to dissipate as 2023
economy is sliding into a recession. Recent stock market progresses, especially so at the headline level, as commodity
prices, ex-energy, continue their slide in response to weak
gains may fade as the slowdown advances, but they global demand. Underlying inflation may prove more “sticky”,
should recover from mid-2023. but any diminution should encourage systemic central banks
to slow the pace of monetary policy tightening, then pause and
THE GLOBAL ECONOMY WILL SUFFER ITS LOWEST ultimately pivot lower. There will, however, be significant
GROWTH RATE IN FOUR DECADES IN 2023 geographical variance in both the timing and nature of the
eventual pivot. The European Central Bank is thought unlikely
Persistently high inflation and the monetary policy response
are driving the global economy into recession. The coming to cut regional rates at all over 2023 and while the proposed
global weakness will see sluggish growth or even outright GDP fiscal tightening may limit the scope for aggressive rate hikes in
contractions in most developed economies outside the United the U.K., underlying price pressures are unlikely to encourage
States, with the eurozone likely to fare worst. Whilst compari- the Bank of England into an easier policy stance until the back
sons are likely to be made between the pandemic-induced end of next year.
recession of 2020 or the Great Financial Crisis period, adjusting
for changes in trend growth, the depth of the coming downturn
is more likely to resemble that of the 1990s than anything more
recent.

*An affiliate of Raymond James & Associates, Inc., and Raymond James Financial Services, Inc.

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