Heading into the second half of 2023, investors may wonder what’s changed, and whether previous estimations still apply. For us, the ‘year of the cool-down’ continues, as we had labelled 2023 in our previous outlook. Compared to the prospects six months ago, inflation numbers have proven to be stickier than expected but so has economic momentum. To a certain extent, the higher economic activity resulted in a slower fall of inflation rates.

However, what has changed are the expectations for 2024 – and a deep dive on this and more can be found in our Beyond Markets webcast, and in our brochure, available for download from 27 June.

These changed expectations for 2024 are due to central banks choosing to tighten monetary supply more than we had hoped for at the outset of 2023. In terms of numbers, this means that we expect the global inflation rate to slow down to between +5% and +6% by year end and growth to slow down to around +2.5%. The prospects for 2024 – which will increasingly influence markets in the second half of 2023 – we see as follows: a considerable slowdown in inflation and a slight decline in growth.

While these projections are still far out, it is worth noting that, by and large, the divergences in the global economy could remain in place for the foreseeable future. These divergences pertain, in particular, to the change in the rate of growth. In other words, the US will likely cool off more than other countries after having been a growth stronghold in the past two years. At the same time, China is catching up after its reopening. And Europe has a fair chance of slowing only moderately, as Chinese demand kicks in. The odds are fair for the global economy to be better balanced come 2024.

What about the chances of a recession?

Recession risks for the US are now material; our bond yield models signal something like a 50% probability of a recession occurring in the next 12 months. This is like flipping a coin. Yet it is important to stress that should a recession occur, it is likely to be mild. And, even more importantly, we see the risks of a global recession as far lower. As mentioned above, the divergence between the US, China, and Europe helps reduce the chances of a globally synchronised recession.

The reason for thinking that the US might only experience a mild recession is the state of the consumer in Western economies. Going into the Great Financial Crisis back in 2007, private households were highly leveraged and their key asset – housing – plummeted in value. The situation today could not be more different. Private households are extremely conservatively financed in historical terms and, in addition, they still hold a large share of cash, as outlined in the chart above.

For more of our insights, plus our outlook on fixed income, equities, alternative investments, Next Generation trends, and more, download our Market Outlook Mid-Year 2023 brochure now.