Outlook on the economy
Economic growth expectations not high
Economists assume that western economies in particular will have little or no growth in 2023. Europe in particular is expected to suffer. The effects of high energy prices and the (partly as a result) decrease in the purchasing power of European consumers make a recession in the first months of 2023 almost inevitable. The US economy is less vulnerable to high energy prices. There, sharply higher interest rates will increasingly cause problems for businesses and consumers. Also, the current relatively expensive dollar is putting pressure on the US export position. For China, the third large economy, the loosening of its very strict corona policy would appear to be positive. But in the short term, economic growth will depend mainly on how the Chinese authorities deal with the sharply rising number of corona infections. Vaccination rates are low and the healthcare system is not highly developed, with limited availability of ICU beds in hospitals.
Emerging markets may benefit
For emerging markets, much depends on the development of food and energy prices, the US dollar and the Chinese economy. The recent fall in food and energy prices is positive for the development of purchasing power in the emerging markets. But for some countries (notably in the Middle East, Africa and Russia), some of this benefit will be offset by lower exports. The US dollar has already weakened slightly over the past few months, which in principle favours emerging market currencies. This particularly benefits emerging countries with relatively high levels of US dollar-denominated debt, such as Turkey and Indonesia. A bright spot for - particularly Asian - emerging markets could be the rebound of the Chinese economy, as a relatively large share of their exports goes to China.
Slower pace, no interest rate cut?
Given the moderate economic outlook, inflationary pressures are expected to ease to 3% or 4% by 2023, in both the eurozone and the US. The impact of the reopening of the Chinese economy and the fading into the background of problems in supply chains are uncertain factors. Inflation is not expected to come close to the 2% target of the European and US central banks (the ECB and the Fed). It is thus unlikely that they have already finished raising base rates. However, there are differences between the expectations of the financial markets and of central bankers on this point. The financial markets are estimating that with a base rate of 5% by the end of the first quarter 2023, the Fed will stop raising interest rates and that the ECB will reach this point with a base rate of 3.5% in the summer. But both Fed chairman Jerome Powell and ECB member Klaas Knot have indicated that this estimate is more likely to be too low rather than too high.
Financial markets, our view
For now, we assume a scenario with (slightly) higher capital market interest rates. For equities and other riskier asset classes, such a scenario is not necessarily good news. Corporate bonds offer a relatively ‘safer’ option. However, we are not counting on high returns for this asset class either in the coming period if interest rates continue to rise. This calls for caution: we are maintaining an above-average cash position (money that is not invested) and an underweight in government bonds.