Wishing you all a Happy New Year of the Rabbit!

For the first time in three years, the phrase “light at the end of the tunnel” no longer seems a distant possibility. As Mainland China and Hong Kong scrap most Covid-related restrictions, there is a real buzz in the community as we can finally put the pandemic behind us this year. Notwithstanding such a welcome development towards restoring normalcy, there seems no shortage of uncertainties around the world. This column will look at a few of the key issues facing the global economy that will likely define 2023.

Inflation 

By definition, the annual rate of inflation is the percentage change of prices for a set of goods and services compared with the same month a year ago. Over the next 12 months, global inflation should fall quite dramatically as the high base of comparison will help put a lid on the headline figures and the global economy is slowing down. Although prices, in particular in the United States and Europe, may stop rising as quickly as in 2022, they are likely to remain at high levels, as the Ukraine war drags on and increased costs of energy and raw materials continue to be passed on to consumers. The impact of Mainland China lifting Covid restrictions and reopening to the world will be two-fold: supply chain normalization over the course of the year will be disinflationary, while stronger demand will have the opposite effect. The outcome will depend on the pace and smoothness of the reopening process. 

Interest Rates

As the forces that helped anchor inflation in the past decade have been diminished, borrowing costs have climbed sharply in tandem. The market expects the federal funds rate to peak at close to 5% in the first half of 2023; however, the Federal Reserve and its global peers may be tempted to adopt a more hawkish approach and “overshoot”. To recap Federal Reserve chair Jay Powell’s words in November 2022: “History cautions strongly against prematurely loosening policy. We will stay the course until the job is done.” In other words, the Fed will be more comfortable to pivot only when there is strong evidence that general price pressures and core inflation – which excludes more volatile energy and food prices – are both under control. 

Economic growth

A decade of easy money has encouraged many governments, businesses and households to borrow, which they now have to service at a higher cost. In general, there is a time lag of six to 12 months for the effects of higher interest rates to pass into an economy. Interest rate-sensitive segments of the economy, such as property and the stock market, already felt the pain last year. In 2023, higher borrowing costs will take a toll on the wider economy: consumer spending will be squeezed by inflation while companies, many of which have dipped into their savings since the pandemic, will hold back investments. In the meantime, savers – who were punished during the cheap money era – will now be better rewarded. 

The International Monetary Fund has warned that a third of the world economy will plunge into recession this year. The Federal Reserve’s aggressive rate hikes may tip the U.S. economy into a recession but the resilience of its labour market, with nearly two job openings for every unemployed worker, should confine it to a mild one. In contrast, Europe will likely suffer a steeper downturn as the continent continues to grapple with an energy crisis triggered by the Ukraine war, which shows no sign of resolution. As for the Chinese economy, the “great reopening,” which came sooner than expected after three years of Covid isolation, will see a major bounce back although the current wave of infections has inevitably resulted in temporary disruptions that may last a few months. 

Energy

The Ukraine war highlighted the reality that an energy system which is cleaner, cheaper and more secure continues to be elusive. The global energy markets will remain unstable in the year ahead as the world continues to struggle with the “energy trilemma” of affordability, security and environmental sustainability. In December 2022, the International Energy Agency warned that Europe could face a natural gas shortage of 27 billion cubic metres this year, which is equivalent to nearly 7% of the continent’s annual consumption, even after accounting for its efforts to increase supply and suppress demand. Consuming some 15% of the world’s oil, Mainland China’s reopening is set to drive up demand for oil and gas, bringing further complications to the energy markets. 

This is my last column for the Chamber. To my readers I am profoundly grateful. 

Wilson Chong, [email protected]