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This week, the most important institution lender in the world, the World Bank, downgraded its economic forecast for the year 2023, now predicting an annual growth of only around 1.7% globally. Most notably, the outlook for the U.S. was changed from a stable 2.4% to a recession-level 0.5%, largely thanks to sharp hikes in the Fed’s interest rates in the past few months. If the feared pace comes to pass, this will be the slowest growth in any year since 1993, excluding only the Financial Crisis of 2008 and the COVID lockdowns of 2020.
The World Bank is far from alone in anticipating a rough year ahead. While the worst of the inflationary vicious cycle might have cooled off by the end of 2022, most economists fear that the worst repercussions of the crisis have yet to fully materialize. In fact, the latest Bloomberg survey of economic experts reveals that a staggering 70% now believe a recession is likely in 2023, up from only 30% last June.
There are already early signs of significant underperformance in some key industries in the domestic market. In December, housing sales are already 35.4% lower than they were a year ago, marking the tenth straight month of decline. The Jeffries money market economist Tom Simons warns: “This is going to be a classic recession”. He notes that most pointers indicate an imminent fall in corporate profits, which will inevitably be followed by massive employee layoffs by the summer. The severity of the impact will depend in large part on direction that Federal Reserve policy takes to tackle the two sharp edges of inflation and recession.
Indeed, perhaps the most unique aspect of the potential recession of 2023 will be precisely how predictable and by-the-book it turns out to be. Mark Zandi, the chief economist at Moody’s told the CNBC: “Usually recessions sneak up on us. CEOs never talk about recessions.” This time, however, “It seems CEOs are falling over themselves to say we’re falling into a recession. … Every person on TV says recession. Every economist says recession. I’ve never seen anything like it.”
It is due to this fact, among others, that a minority of economists are still optimistic about the prospects of sustained growth into 2023. One of them, Michael Drury, believes the indicators of an impending recession are insufficient for most major industries exempting only the housing market. Nonetheless, Drury also warns that the eventual outcome of the current situation might ultimately depend on razor thin decisions. He notes that the court battles surrounding the student loan forgiveness by President Biden might be one key factor.