The Outlook for 2023: Rolling Recessions and a Glimmer of Hope for Markets

The coming year will be celebrated in China as the Year of the Rabbit, which is typically viewed as bringing peace, prosperity and good luck. However, the prospects for the global economy at present show scant evidence of such encouraging themes. The pandemic remains in play, the Russia-Ukraine war continues, Europe is enduring a devastating gas shock, and surging inflation has elicited aggressive central bank rate hikes. 

In short, the outlook seems unusually grim.

Consistent with these observations, our Citi forecast sees the global economy as plagued by “rolling” country-level recessions through the year ahead. 

Europe. The gas shock is likely to push the euro area and the United Kingdom into recession before the end of 2022. The euro area should climb out by mid-year, but the recession in the U.K. is seen to continue as the economy struggles with lingering post-Brexit structural adjustments and drag from tighter monetary policy.  

The United States. By the second half of 2023, the accumulated effects of the Fed’s policy tightening are likely to trigger a recession in the United States. Even so, with the U.S. economy showing resilience to date, we expect that the recession will be mild, and growth will bounce back in early 2024. In addition, the financial and balance sheet overhangs that deepened past downturns seem to be absent. 

Emerging Markets. With the U.S. and Europe enduring recessions next year, we see downturns in many emerging-market economies as well, including South Korea, Brazil, Chile, Mexico, and Russia. Notably, however, China looks to be a  counterweight to these recessionary pressures.  We expect that the government’s recent steps to soften Covid restrictions will help unlock pent-up consumer spending and fuel a strengthening in Chinese growth. Even so, the vigor of the household sector’s response is open to debate—the Chinese consumer has been cautious to date. And given the prospect of rising case counts and increased burdens on the health-care system, it remains to be seen whether the easing of Covid measures can be sustained.

Global Growth. All told, global growth during the coming year should slow to just under 2%, well below 2022’s near-trend (3%) performance. Excluding China, global growth is likely to run at less than a 1% pace, approaching some definitions of global recession. Inflation next year is expected to gradually decline but remain high on average. We interpret this pattern of weak economic growth coupled with still-elevated inflation as bearing the imprint of supply shocks, especially the pandemic and disruptions from the Russia-Ukraine war.

An important corollary is that the possibility of a global soft landing—a scenario in which major economies avoid recession altogether—seems to be slipping away. In Europe, a milder-than-usual winter would reduce, but not eliminate, the recessionary pressures from the gas shock. And in the United States, a recession of some stripe will probably be necessary to cool the red-hot labor market.  Even so, the re-opening from Covid has brought a rebound in global services spending, which has supported European growth this year and may be an important buffer for Asia in the face of next year’s global headwinds.

But our pessimism must be leavened with appropriate humility. One thing we’ve learned is that year-ahead forecasts are typically wrong—and often wrong in extraordinary and unanticipated ways. In 2020, it was the onset of the pandemic; in 2021, it was surging global inflation; and in 2022, it was the Russia-Ukraine war, the omicron variant, and the persistence of inflation.

Glimmers of Hope. With this in mind, and in deference to the Year of the Rabbit, it’s appropriate to conclude with a few glimmers of hope. First, looking ahead to 2024, growth is likely to bounce back to just below its 3% trend, and inflation should fall toward more historically normal readings. The projected recessions in 2023 loosen labor markets and calm wage pressures, and this should allow central banks to begin easing policy.  

Second, a grim year for the economy need not translate into a grim year for financial markets. If the global economy is on a healing trajectory by early 2024, sentiment among forward-looking investors should bottom out at some point next year.  The most likely timing for a turn would be the late spring, once central banks have broadly completed their rate hikes.  

Third, the global economy has endured some severe shocks in recent years, but growth and spending have continued to move forward. While conditions at present seem quite challenging, the resilience of the global economy (and individual economies) may surprise us again. Indeed, the luck and prosperity promised by the Year of the Rabbit may yet prevail.

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