Overview
The global economy started 2023 on an unexpectedly positive note with the US on a strong footing, supported by a robust labor market and a reduced drag from high energy prices, the Euro area benefiting from unseasonably warmer weather, and economic activity in China rebounding after the relaxation of its COVID lockdown policy.
- The failure of several US regional banks, along with the shotgun wedding of UBS and Credit Suisse, has heightened systemic worries; while the bank crises appear limited in scope for now, the odds of recession have notably increased from before the banking sector turmoil.
- The Fed has the unenviable task of trying to engineer a decline in inflation while maintaining depositor confidence in a suddenly shaken banking system, and while there is evidence of weaker goods inflation, stickier prices (like core services excluding housing) are expected to prevent inflation from swiftly falling back to the Fed's 2% target.
- A faster pace of ECB hikes potentially sets the stage for disappointing European growth in 2023, while China has the potential to post an upside growth surprise following the government's fast-tracked reopening.