The last week of the year is usually a particularly dull week in the markets. Not only have a large number of investors already gone on vacation, but also this week there is almost no macro data being published or events of any importance. Therefore, the last week is usually the week when everyone is busy with summaries of the past year and predictions for the year that will benefit us. Since after a year like 2022 all we ask is for something to change, here are the predictions for what won’t happen in 2023:
We will not be able to avoid a recession
Yes, sometimes it’s better to start with the bad news and put things on the table. The effects of interest rate hikes all over the world will be fully reflected during the first half of the year and the result will be a global recession. Households are forced to deal not only with a sharp increase in the cost of living and a rough erosion of their real income, but also with high credit costs and a rapid decrease in available savings that are still left over from the Corona period. Accordingly, during the coming months we will feel the tightening of the consumer’s belt around the world and the resulting damage to growth. Of course, businesses are not immune to interest rate hikes either. The cost of credit increased, of course, but this effect is not immediate, since the years when the cost of credit was low allowed many businesses to spread their debts over the long term. At the same time, it is clear that at the current interest rate, the viability of taking new credit for investment purposes has decreased significantly, which will be reflected in further damage to growth. It is important to note that growth throughout the world will encounter a headwind this year also because it is technical in nature but has an impact on everything. After the economic boom of late 2021 and early 2022, growth slows down anyway. Households took advantage of the exit from the corona and the high savings to advance purchases of years and the businesses recruited workers at high wages to meet a demand that will not return. We are now beginning to feel the mirror image of this period.
Inflation will not continue to rise
The good news of the recession we are entering is that inflation will finally come down. All over the world we are already feeling the decrease in the inflationary pressures of the factors on the supply side (transportation, lack of raw materials, etc.) but also the increase in the influence of the factors on the demand side, which leaves inflation high. In 2023, we expect to see a combination of two factors that will lower inflation significantly: on the one hand, the supply side will become deflationary, meaning that we can expect a decrease in the prices of various products such as cars, furniture or large electrical appliances. On the other hand, the recession and the increase in unemployment that will follow will release pressure from demand-side inflation. The housing section, which contributes a large part of the current inflation all over the world, is expected to moderate, when in the US, for example, we are already seeing a real slowdown in the inflation of new rental contracts.
Neither is the interest rate
The result of the two sections above is that the process of raising interest rates in Israel and in Israel is really close to its end. The combination of a drop in inflation (which of course the central banks attributed to themselves even though most of it comes from the supply side and is not related to the interest rate increases) and the slowdown in economic activity will convince the central banks that it is possible to stop the interest rate increases within a few months. At the same time, if there’s anything you can count on, it’s that the central banks will react late this time as well. In light of the trauma of the past year and a half and since it is clear to the central banks that another inflationary process is the highest risk for them, it is likely that the interest rate in most countries in the world will remain high for a long time and will only start to decrease when the labor market is sufficiently weak, which strengthens the assessment in the first section.
There will be no silence here
Without becoming a political text and entering into the ever-increasing polarization between the left and the right, between the secular and the religious and between the Jews and the Arabs, the political environment in Israel is expected to be especially noisy in the coming year. The salary agreements in the public sector have to be signed during the year and it is difficult to see how the negotiation process ends without demonstrations, strikes and everything that usually accompanies such processes, especially in the year of a new government.
The world will not be quiet either. Despite the previous section, relative to the rest of the world the political environment in Israel will probably be quiet. The war in Ukraine is not over and the gap between the Western countries and Russia, Iran and China is only growing. Europe is facing a difficult winter that will only intensify the political pressures that will accompany the process of raising interest rates by the ECB and the desire to avoid the consequences of kicking the debt can of Italy down the street in the last 10 years. China wants to loosen its zero-covid policy but it is estimated that it could cost it thousands of deaths every day as the administration, eager to prove its policy is the right one, has refrained from investing in health services for the past two years. Already this morning we are hearing about new restrictions in Shanghai and it is likely that this whole process will be accompanied by quite a few difficulties in the future as well. In this aspect, we note that it is precisely in the USA that the political-social environment seems to be the quietest at the moment, although the precarious economic environment and the waves of immigration from the south may take their toll.
The stock market will not record another year of negative returns
Since the beginning of the 1930s of the last century, the capital markets have not recorded two consecutive years of price declines. True, history is also littered with statisticians who drowned in pools with an average depth of half a meter, but the economic environment is not one that justifies another year of falling rates. This does not mean, of course, that from here on the markets will only go up every day. Entering a recession in the first half of the year will put pressure on the companies’ profits and it is hard to say that this scenario is fully priced in, but if there are no big surprises then the world will return to growth in the second half of the year and the central banks will start talking about interest rate reductions towards the end of the year. All this is expected to give a boost to the markets.
*** The writer is the chief strategist of Psagot Investment House ***