Advertisement
Macroscope | Why equity and bond investors can expect better returns in 2023
- We may be near the end of the interest rate cycle after the Fed’s aggressive ‘front-loading’ of rises
- As imbalances created by the pandemic and disruptions caused by the war in Ukraine recede, lower inflation can be expected
Reading Time:3 minutes
Why you can trust SCMP
1
What happens to US interest rates from here on is important to investors everywhere – through the influence they have on the US economy, on global rates and the dollar. There are reasons to believe we may be near the end of the interest rate cycle after the most aggressive “front-loading” of rate rises for many decades.
Advertisement
The US Federal Reserve has increased rates by 225 basis points since March. The suggestion is that there could be one or more moves to come but evidence is beginning to mount that the US economy is slowing. Markets are now pricing in that the Fed will be cutting rates by the end of 2023 in response to the US being in a recession. Indeed, official data suggests a recession may have already begun, with real gross domestic product growth being negative in both the first and second quarters.
Inflation data is key to the outlook. Consumer price inflation reached 9.1 per cent in June. This, of course, is a manifestation of the global cost-of-living crisis driven by higher food and energy prices. Even without monetary tightening, higher inflation was likely to slow global growth as consumer real income growth turns negative and businesses face higher costs and pressure on profit margins.
In its recent forecasts, the International Monetary Fund revised its global growth outlook to 3.2 per cent for this year and 2.9 per cent for 2023 – down 0.4 and 0.7 percentage points from April. For many advanced countries, the 2023 forecast is low enough to suggest one or two quarters of negative growth – the traditional benchmark for a recession. High energy prices are the single most important cause of this gloomier outlook.
For Asia, the growth outlook is better. Inflation has risen in the region because of the spike in global energy prices. However, in many Asian countries, headline inflation rates are less than in the US or Europe and consensus forecasts suggest this will continue in 2023.
Advertisement
While there has been some increase in regional interest rates, lower average inflation than in the US and a peak in rate expectations in the advanced economies should allow rates to come down again in 2023.
This is reflected in the growth outlook. The IMF forecasts that the Asean-5 economies will grow at rates above 5 per cent this year and next, that India will see only a moderate deceleration to just above 6 per cent and China will record stronger GDP growth in 2023 at 4.6 per cent relative to an estimated 3.3 per cent this year.
Advertisement