Outlook 2023: sticking the landing

For the global economy in the new year, it’s all about sticking the landing.

The aggressive monetary policy tightening seen through 2022 around the world will - as it is designed to – show up in the economy more forcefully over the next 12 months, in the form of slower consumption and softer activity.

I don't think the landing is going to be too bumpy. There will inevitably be some difficulties, but a few factors suggest we shouldn't be expecting the worst.

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Firstly, household balance sheets are in very good shape in Australia. In the US and elsewhere, households have worked hard the last 15 years to improve their positions.

Secondly, in the US, the period of strong growth has been led by the real economy rather than by credit. This has been the least-credit intensive US economic upswing in at least four decades.

Thirdly, China has been easing policy rather than tightening. As 2023 progresses, I am hopeful COVID will be less of a constraint on China’s economy and easing can flow through to stronger activity.

Low point

Crucially, this is likely to be occurring at just the time growth elsewhere is at its low point. Recessions are likely in the US, Europe and United Kingdom, but they aren't likely to be too damaging. In fact, a recalibration of demand and supply is likely to benefit some parts of the economy.

A mild recession will bring some respite to consumers facing challenging cost-of-living issues. It will also normalise demand such that businesses will be better able to achieve surety of supply and hold on to staff.

Certainly, a recession will be disruptive for some industries and businesses. But inflation itself is disruptive and damaging.

In Australia, a recession is unlikely. That doesn't mean we'll get off scot-free. House prices are likely to fall further. Housing construction activity and home lending will follow. Price declines has been orderly so far, though, and I expect that to continue.

Strong employment is limiting the number of full sellers and strong wage and employment growth are helping consumers cope with higher interest rates.

Business lending has more than offset the slowdown in house lending. Business investment expectations have remained strong, suggesting as consumer demand slows and frees up resources, investment is likely to pick up some of that slack.

Global support for climate change has broadened and will influence much. The things we want to do will increasingly need to be thought of in opportunity cost terms. What will we do less of in order to free up the resources? That’s a key question for 2023.

Richard Yetsenga is Chief Economist at ANZ