Is a global recession inevitable in 2023?
8 min read
The recession forecast is based on the prediction that the Federal Reserve will continue stepping up interest rates by a further 100 basis points through March next year. 2022 has been a year or ‘permacrisis’, a term coined by the editors of Collins English Dictionary to sum up the year, in a nutshell. 2022 has indeed been “an extended period of instability and insecurity” as the world recovered from the global pandemic, admittedly with a couple of painfully arduous hurdles that would drag on to the 2023 as it dawns. Three main crises have been the cause for consternation for most of us as we approach the next year, making the prediction of an inevitable global recession pretty much palpable.
Geopolitical tensions
Earlier this year, Russia waged a war that would have global consequences when Putin made the decision to invade Ukraine. The US and European countries responded to Russia’s aggression with a resolve that could possibly revitalise the idea of “the West”, reinforcing the divide between the powerhouses. Xi Jinping’s support for Russia, though not overtly expressed, also served to make matters worse. This turbulent year of unfortunate events had resulted in a profound strain in the relationship between America and China, intensifying competition between the two mega economies. This competition is causing geopolitical uncertainties in the region, such as the alliance of convenience between America and Saudi Arabia.
As a sign of vehement disapproval of Putin’s encroachment, the western nations had imposed harsh sanctions on Russia. These included banning secondary trade in Russian government bonds, interaction with key Russian banks, exports of critical technology to Russia, and the freezing of assets. Germany even halted certification of the Nord Stream 2 gas pipeline. The invasion had also led to the prices of other commodities that Russia and Ukraine export, such as wheat and corn, increasing as well. Even though there were no direct sanctions on trade in oil, many shipping companies across the globe shunned the Russian oil market to avoid legal and reputational risks associated with doing business with Russia. The outcome was the shortage of consumer goods and hence rising prices. More importantly, reductions in exports of Russian commodities led to even higher global commodity prices, thereby affecting many other nations around the world.
The two fundamental channels by which the war affected the global economy are the changes in commodity prices and disruption of supply chains for commodities. Just a week after the war started, the global prices of oil and natural gas rose sharply, particularly in Europe. Prices of key mineral and food commodities also surged, including nickel, palladium, wheat and corn. These increases possibly reflected fear and risk, as opposed to the direct effects of the sanctions or trade disruptions. With investors panicking at the wake of an incursion that might escalate, price fluctuations were inevitable.
In a nutshell, the war that started on the 24th of February contributed largely to the two other crises threatening to linger on in 2023, with a presence far greater than we’d like.
Soaring energy prices
The war in Ukraine has led to the biggest commodity shock and is rapidly morphing the global energy system. With the port of Odessa virtually closed, mass global hunger might become a possibility as Ukraine, being a major agricultural exporter, loses its means to deliver goods across borders. At present, even nations geographically safe from the war zone have found themselves afflicted with higher prices of food and fertiliser at home.
Europe’s dependence on Russian oil commodities has made the nation one of the greater victims of the war. Putin’s penchant for being aggressive caused him to use his gas exports as a weapon of the war, rendering swathes of Europe’s energy-intensive industry unviable overnight, strong-arming governments to spend billions cushioning consumers and propelling a frantic scramble for novel sources of supply. To top it off, 2022 was a year when climate change was in disarray as we witnessed disasters from floods in Pakistan to heatwaves in Europe. The skyrocketing energy prices have even prompted the environmental activists in the politicians to turn coal plants back on, threatening the sustainability of the environment.
Macroeconomic instability
Of course, with energy prices soaring comes the third crisis: economic instability. 2022 was the year that recovery from the pandemic took place on a global scale. But this came with a price of post-pandemic supply constraints as demand came with a vengeance after the series of lockdowns and restrictions in the past two years. As energy and food prices surged, inflation that was initially thought to be temporary ended up persisting beyond our calculations, leading into the double digits. This sparked the quantitative tightening that we are currently experiencing, and will still be living through to 2023. The world’s big central banks, led by the Feds, undertook the most rapid and broadest set of global rate increases in at least forty years. Unfortunately, the goal of macroeconomic stability is still at the end of the rainbow, at least for the year of 2022. Global inflation is adamantly remaining close to double digits and central banks are still ramping up rates globally, albeit at a slightly slower rate.
With job growth still way over the speed limit that the Fed ideally prefers and wage growth driven by up wage expectations, inflation seems harder than ever to keep down. This means that there is a high possibility that the Fed will have to remain aggressive to contain inflation expectations. By far, the Fed has increased interest rates by a whopping 375 basis points this year since March, and this is what is sparking concerns about a recession. Morgan Stanley sees the Fed delivering its first rate cut by December next year, taking the benchmark rate to 4.375% by the end of 2023. Barclays sees the rate between 4.25% and 4.50% by the end of next year, while Deutsche Bank is predicting it at 4.625% after a rate cut. UBS expects inflation in the US to be close enough to the Fed’s 2% target by the end of next year in order for the central bank to consider rate cuts.
Overall, analysts are not expecting recession next year to cut us deep, just a graze perhaps. And that’s our silver lining. Nonetheless, we would all still be affected by it. Economists are expecting employment to fall by 2 million next year, andOverall, analysts are not expecting recession next year to cut us deep, just a graze perhaps. And that’s our silver lining. Nonetheless, we would all still be affected by it. Economists are expecting employment to fall by 2 million next year, and that will be how we define our recession, one defined by the loss of jobs. The job loss prediction is about a quarter of the number of people unemployed in 2009 after the catastrophic financial crisis of ’08. But overall, it is the uncertainty that wrecks fear and havoc in our hearts, which would be reflected in the markets eventually. that will be how we define our recession, one defined by the loss of jobs. The job loss prediction is about a quarter of the number of people unemployed in 2009 after the catastrophic financial crisis of ’08. But overall, it is the uncertainty that wrecks fear and havoc in our hearts, which would be reflected in the markets eventually.
Trader’s View
Global recession will certainly happen in the future, but it won’t take place right away as real economic changes often trail monetary policy changes by about a year. Data from the third quarter of 2022 showed no signs of a recession, with real GDP growing by 1.3%. As more information becomes available, that preliminary estimate is subjected to change.
It’s possible to prevent a recession, but it’s highly improbable. The only policy measures that could prevent a recession would end up worsening inflation and eventually lead to an even worse slump.
The most likely scenario is a recession that starts in late 2023 or early 2024. However this projection should be interpreted with a grain of salt because it is extremely challenging to predict when exactly a recession will start.
Although the immediate future for the global economy and for much of the world’s population is bleak, there are some silver linings. Crises compel changes that may ultimately raise living conditions and strengthen economies.
The focus is on USD/JPY. Since the US often sets the standard for monetary policy for the majority of the other nations, there is a link between the global recession and the US, with reference to technical and fundamental analyses.
Given this position, I would rather go short on the USD/JPY because the inflation statistics for the previous two months indicated that inflation is gradually declining. So, given that the US central bank would delay or stop raising interest rates, we may anticipate a lower USD.
This is a fantastic time to start a short trade right now. The price’s rebound from the trendline suggests that the USD/JPY will maintain its downward pace. The horizontal support and resistance line will also be examined. Price dropped to 133.70 before rising back to 138 and stayed there for some time. This suggests that the resistance level at 138.00 is a solid one, and that a decent entry point is around 137.25 when combined with the diagonal trendline. For taking profit price, we are looking at the next support zone at 131.50.
