Franklin Templeton: Outlook for 2023
Preview
It is a complicated and fragmented world, all adding to heightened uncertainty about next year’s outlook:
- US monetary authorities have moved aggressively since March to put out the inflationary fire that they started with extreme but opposite measures last year.
- China’s policymakers are adding stimulus to their economy to ensure that all the depressing measures they inflicted in the past year do not turn into deflation.
- European policymakers are caught betwixt and between—fighting the worst inflation in decades while subsidizing households from the soaring energy costs responsible for that inflation.
- US housing is in a recession, caused by high rates. However, the auto sector is rebounding, and car prices are flattening out as normalizing supply factors lift production, inventories, and sales from depressed levels.
- The Treasury yield curve signals rates are high enough to bring inflation back on track. On the other hand, the broad stock market is still not priced for a US recession despite near universal expectations of one from both public and private sector forecasters.
Amid the crosscurrents, two themes have prevailed during the post-pandemic years, which lend some perspective to the macroeconomic road map ahead: namely, the bipolar swings in macro policy and the forces of economic normalization. The lockdowns knocked the world severely off the prevailing path of “normal.” Since then, judgment—most of it bad—about what was needed to get back on that path has led to some wild swings in macro policy. The effect of each extreme policy pivot plus the natural tendency to normalize has flowed through into asset markets, real economic activity, and inflation. In 2023, we expect it should be no different.
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