Economic Outlook 2023: Increasingly Gloomy?

The outlook of the global economy in 2023 has been shady. 2022 was a relatively more stable year after the volatility of 2020 and 2021. However, this year was also turbulent with the Russian invasion of Ukraine, the energy crisis and from supply and demand issues spilling into labour markets. What is Alphavalue’s outlook for 2023? Recently, our co-founder and head of strategy, Pierre-Yves Gauthier held his monthly strategy meeting for our clients where he discussed the Economic Outlook 2023. Here are a few takeaways below :  

• More restrictive monetary conditions: While inflation is to gradually ease, notably in the US, it will remain substantially above the 2% target of both the FED and the ECB. It is likely that some inflationary pressure will ease, notably supply chain related as China gradually reopens, but this will also create inflationary pressure, notably on raw materials. We tend to believe the central banks when they say that they will not cut rates in 2023.  Furthermore, the quantitative tightening that started in the US and the UK will be followed by the ECB providing even tighter financial economic conditions 

Source - Trading Economics

• Substantial economic slowdown: economies will slow down further in 2023. According to Tradingeconomics, the Eurozone will grow by a meagre 0.4% while the US will grow by 0.5%. Uncertainty remains significantly elevated and we believe that if any surprise comes on the downside of these expectations a recession is a possible scenario, at least for the Eurozone. Energy prices will remain elevated throughout 2023 and it is unlikely that the cost can be passed through to consumers and governments without any impact on demand.   

Source - Trading Economics

• An even worse impact for companies: We remain amazed by the very strong results published by European companies in 2023. Nevertheless, we continue to believe that these results are not sustainable over the long run and that European and US consumers will have to cut their spending, applying massive pressure on the results of companies. Our analysts expect earnings to drop only 3.5% in 2023 after a 12% rise in 2022 and a 96% increase in 21. In order to reach the 2019 level, the last “normal year” before the central banks flooded the market with free money, 2023 earnings need to drop c 25%. 

• Whatever it takes days are over: In all, we believe the market is used to Central banks saving the day by flooding money on markets to keep prices of assets falling and expect that 2023 will be no different. However, inflation and rising rates are new massive constraints on both central banks and governments. It is possible that “a whatever it takes policy” will simply be impossible to implement this time. If so, a repricing of assets will be unavoidable.   

• Sector-wise, dearer money will likely take a longer toll on tech/growth sectors. This may leave investors to continue to try their luck in dividend-paying sectors such as Financials and Deep Cyclicals assuming a 2023 slowdown does not morph into a deep recession. Eventually, the continuing question marks are about China: will the most important Luxury sector be shunned as Chinese tourists fly again and spend on beaches instead? Will the US control of IP on Semiconductors lead to European players losing business in China because of the CHIPS Act? Caution is required on both counts 

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