Far from normalising, international commerce has reorganised according to political alliances, marking the dawn of a multipolar world.
This has resulted in a new economic reality, with more elevated inflation and a monetary policy regime prioritising inflation stability over economic growth.
As a result, interest rates are at their highest in years and the global economy is slowing.
Looking ahead, coronavirus-related disruptions in production centres like China, shifting demographics, climate change, weakening business investment in the aftermath of geopolitical ruptures all suggest a much slower average pace of global economic growth than in the 2010-2019 period.
Inflation will remain an issue in 2023, although it is likely to peak and start to decline.
US and China growing below potential, eurozone in recession
The US will manage to narrowly avoid recession in 2023, according to our forecasts.
Tighter financial conditions are leading to a pullback in cyclical spending, namely goods consumption and housing, but healthy balance sheets and a resilient labour market should act as a buffer against an outright downturn, in part thanks to a continued recovery in spending on services.
In the eurozone, the energy crisis is dominant. A recession most likely started in the fourth quarter of 2022 and will persist until late in the first quarter of next year, with a peak-to-trough fall in gross domestic product of about 1 per cent.
Russia's Gazprom gas pipelines to Europe — in pictures
Fiscal policy support, resilient labour markets and high savings should mitigate the worst of the downturn, but the risks are on the downside amid persistent uncertainty over gas supply.
For China, below-consensus growth of 4.5 per cent in 2023 will represent a bounce from 3.3 per cent this year.
However, lower growth potential, fiscal consolidation and a slow shift away from the government’s zero-Covid policy should prevent the economy from growing more strongly.
A likely continued decline in land sales beyond 2022 will probably prolong the risk of policy hesitation at local government level even after the end of coronavirus disruptions.
The decisive factor will be how quickly China can move away from these disruptions, with first signs indicating that it will do so gradually.
Timing-wise, China’s reopening on the mainland can be expected to lag that of Hong Kong by about six months. Hence, we expect any meaningful reopening to happen only towards the end of the first quarter in 2023.
GCC: beneficiaries of geopolitical fractures
In 2022, GCC economies broadly benefited from higher oil prices and a boost to their domestic economies following the pandemic and the transformed geopolitical environment.
Their GDP growth is likely to moderate to 3.4 per cent in 2023 after reaching 6.1 per cent in 2022, as the global economy slows down.
Nevertheless, the region looks set to grow more rapidly than the global average, supported by still elevated oil prices.
As a result, 2023 should see the fiscal surplus ease modestly to 7.1 per cent of GDP and the current account surplus to 15 per cent.
A better measure of economic activity is non-oil GDP growth, which should ease from 4.8 per cent to 4.3 per cent over the same period.
This stresses the importance of transformation plans across the GCC, which are revitalising the private sector.
The combination of targeted government subsidies and a firm peg of local currencies to the US dollar is expected to keep inflation below 3 per cent in 2023.
A relatively more constructive economic backdrop, coupled with a robust pipeline of initial public offerings and initiatives to raise foreign ownership limits further, should allow for a much more defensive performance for GCC equities in the year ahead.
This is in contrast to previous cycles when a weak global backdrop saw the GCC underperform developed and emerging markets.
Financial markets 2023: yields make a comeback
As for financial markets, as inflation peaks and monetary policy reaches restrictive territory, fixed income should become more attractive again.
This means that the performance of bonds and equities should again diverge, as equity markets could still be volatile in the first half of 2023 and slower economic growth hits company earnings.
We expect core bonds to once again play a more relevant role within portfolios going forward.
Yields have now reached levels that offer some protection against adverse market effects that will likely occur as we work through a period of substantial economic uncertainty.
Furthermore, the diversification benefits of adding bonds to a portfolio, which were absent in 2022 as both equities and bonds declined, should become tangible again, especially once growth risks start to dominate the headlines.
Continued headwinds for equities
The environment remains challenging for equity markets, as nominal economic growth is expected to slow substantially, thereby reducing revenue growth potential.
Furthermore, close to record-high corporate profit margins will likely come under pressure and start to reflect various cost pressures, including the energy price shock, higher wages and more expensive financing costs.
Such an environment speaks in favour of more defensive equity strategies.
Companies that can defend profit margins by passing on higher costs and that operate in fields with high barriers to entry — characteristics that can be found in defensive quality segments — are likely to outperform.
Once the interest rate environment starts to stabilise and uncertainty diminishes, however, it will likely be time to shift into quality growth companies, which are currently facing substantial headwinds from increasing rates.
In 2023, the key for investors will be to continue to look for economic and financial market inflection points, actively manage risks and adjust asset allocations to create broadly diversified and robust investment portfolios.
Dr Nannette Hechler-Fayd’herbe is the chief investment officer for EMEA and global head of economics and research at Credit Suisse