2. Major central banks will remain restrictive even as economies contract
The Australian, Canadian, and European central banks have all moved to, or hinted at, a slower pace of tightening. But the policy changes unleashed by central bankers this year are not reversing quickly.
For one thing, the data that really matter are not cooling quickly enough, despite the latest CPI report. Inflation in the euro area rose to 10.7% in October, for example, well above expectations. US wages and inflation are still uncomfortably high. And jobless rates in the US, Europe and the UK are very low. Even if central banks stop hiking early next year, they might have to hike further later in the year.
And more critically, a pause is not a pivot – consider the US. As 2022's hikes hit the economy in 2023, the Fed expects the jobless rate to rise to 4.3%, along with a 4.6% funds rate. Our analysts forecast a 4.8% jobless rate in 12 months and a 4.5% fed funds rate. Regardless of which forecast is correct, one fact seems inescapable: the US will see large job losses, yet Fed policy will be very restrictive.
If 2022 was the year of policy “shock and awe,” 2023 will be the year of living with it.