In 2023, global central banks will continue tightening monetary policies to combat high inflation. Notably, global rate hikes will continue in Q1, further escalating the risk of an economic slowdown. Europe will particularly face more significant downward risks. Still, investors can seek suitable opportunities despite the crisis.

The Fed raised its Federal Funds Rate (FFR) from zero to 4.5% in the past year, seriously affecting global stock markets and commodity prices. Investors were expecting the Fed and other central banks to slow down rate hikes in Q4 2022 to shore up stock markets and commodity prices. However, the Fed and European central banks explicitly stated that they would continue tightening monetary policies in 2023 to reduce financial liquidity in the market and curb the risk of sustained high inflation. The hawkish policy stance causes significant pressure on stock indexes and commodities.

The Fed revealed in December 2022 that the FFR would continue to rise in 2023. The target rate for the first half of 2023 is 5.1%, according to the prospect dot plot jointly made by the Fed officials. Therefore, there is space for the rate hike to rise by at least 0.6% based on the 4.5% figure at the end of 2022. The Fed is expected to raise the FFR to 5% or higher in Q1. Meanwhile, the Fed chair, Jerome Powell, stressed that the Fed’s rate hikes would slow down in 2023 but would not stop. The central banks in Europe and emerging markets also expressed their intention to continue raising interest rates. So, rate hikes are expected to continue in 2023, which may increase the risk of a global recession and trigger more risk aversion among investors.

When the global inflation rates remained high and American interest rates peaked in the past half century, long-term and short-term treasury yields often topped 5%, triggering a recession. With the economic environment tightening sharply over the last year — and being expected to continue in Q1 2023 — we predict the US economy will slow down steadily in the first quarter and the first half of 2023, leading to a moderate recession and a more pronounced downturn. It is worth noting that the U.S. unemployment rate is likely to soar to above 5%, which will indirectly reduce overall national income and consumer spending. Less consumer spending has a direct impact on corporate profits. Alongside high interest rates that continuously drive up commodity prices and costs, the US economic growth will be derailed, and stock market volatility will become more frequent. The domino effect induced by the volatile American stock markets could trigger the collapse of other stock markets worldwide. In such a situation, investors should not be too focused on the stock market but instead should consider traditional safe-haven instruments such as gold and silver. If the economic downside risk continues, energy prices may face a more severe demand slowdown leading to a further decline. Also, due to the downside risk, cryptocurrencyrelated trading activities will drop. The rising interest rates will also cause the investment-related cryptocurrency activities to slow down too. Thus, cryptocurrency prices may continue falling.

This is the global economic outlook for Q1 2023 offered by ATFX’s global team of market experts. We hope that you will find it a helpful investment guide as you navigate the investment markets. 

By Martin Lam, ATFX Chief Analyst of Asia Pacific