Bear With US: Tough Year Ahead for Global Economy

In a weakening global economy, crude oil will trade at about 10% lower in 2023 than the 2022 average, Fitch Solutions forecast, but natural gas prices—likely to be mired at a low level—could rally if China’s economy grows more strongly than expected.

“If China comes back in a big way, then, of course, it’s going to impact the gas markets, which are very tight right now,” Cedric Chehab, global head of country risk for Fitch Solutions, said during a Dec. 15 webinar. “It could potentially impact the energy market more broadly.”

Unlike the European economy, which is forecast to contract, and the U.S., primed for an anemic 0.3% growth, Fitch Solutions expects China to grow 3.6% in the next year. But China’s economic performance was only one of several macroeconomic factors that Chehab outlined. The chief expectation is a sharp slowing of global growth from 3.1% this year to 1.9% in 2023. Except for the pandemic-induced slowdown in 2020, such a decline would be the slowest pace of growth since the global financial crisis in 2007-2009.

Fitch Solutions, he said, takes a slightly more bearish view of the upcoming year than its peers. It expects relatively flat growth for markets and for the U.S. to experience a recession, albeit a brief and shallow one, in the second half of 2023.

“The slowdown is being driven by a combination of tightening monetary policy, rising inflation which is eating into consumer earnings and business profit margins, as well as our expectations for tighter fiscal policy in the coming quarters,” Chehab said.

The longer-term view doesn’t look much better.

“The recovery in 2024 is also going to be quite tepid in our view,” he said. “We think the global economy will pick up to about 2.6%, which isn’t that great, and this is because trend growth globally is actually coming down in general, but also because there’s limited scope and appetite by policymakers to ease policy significantly, as they had done in the past.”

Other key factors

Interest rates: Fitch believes major central banks such as the U.S. Federal Reserve and the European Central Bank to maintain a hawkish approach to interest rates and be slow to cut them, even when growth slows and inflationary pressures ease. The base case has inflation slowing to 4% by the end of the year. If it remains stubborn, however, the rate could land at about 5%. Even at that level, inflation would still be at double the pre-pandemic rate.

Fiscal Policy: Governments in most major economies will tighten policy next year as they roll back emergency spending plans, feel pressure from market forces and legislators focus on fiscal consolidation. Aggregate government spending will dip 1%, led by China, Germany, Russia and the U.S. However, Brazil and Colombia and expected to counter this trend by loosening fiscal policies to spur growth.

U.S. dollar: “We don’t think that the strength of the U.S. dollar in 2022 will be replicated next year, and we actually think that the dollar will, on average, be weaker,” Chehab said. In fact, it’s possible the dollar already peaked in September, though it’s too soon to tell for certain.

Fitch sees several reasons for the dollar to weaken. Investors remain long on the dollar and may add more short positions as the dollar weakens, which could push it lower. Also, it is overvalued on exchange rates, although less so than one or two months ago.

But the most important reason is that the Fed could be closing in on its final rate hike. “This means that one of the key pillars of support that pushed the dollar higher will be removed over the coming months,” he said.

A key factor that could lend support to the dollar? An increase in U.S. energy imports.

Political divisions: Numerous elections are scheduled in the next year across emerging and developed markets. Fitch expects the combination of high inflation, higher interest payments and slower growth will lead to an increase in voter unhappiness, resulting in governments lacking strong mandates and majorities in legislatures.

“This, in turn, will create headwinds for policymaking and stifle reforms, particularly as governments focus on short-term problem solving, rather than long-term problem solving,” Chehab said.

U.S. vs. China: Fitch expects a Republican-controlled House of Representatives to demand a harder line on Beijing and for the Biden administration to comply. That would mean strengthening U.S. alliances with Japan, South Korea, the Philippines and Australia to counter China’s regional influence. It would also likely lead to further restrictions on high-tech goods like semiconductor exports to China.

Property markets: The global housing market, sensitive to interest rates, has shown signs of losing momentum in response to tightening monetary policies. A downturn could further pressure world economies.

Labor markets: As the global growth outlook deteriorates in 2023, labor markets will reverse their tightening trends. “Whereas traditionally unemployment typically rises by several percentage points during a recession, we believe that the rise in unemployment will be much more modest over the coming quarters,” he said.

The reasons include the expectation of a relatively mild recession in the U.S. (less so in Europe) and a lower job market participation rate than was typical prior to the pandemic. Fitch also believes that after working so hard to recruit workers, firms will not be as willing to let them go, particularly with the forecast of a relatively brief recession.