The economists’ introduction
The West is headed towards a mild recession
The year 2022 was unusual in many ways. The war in Ukraine cast long shadows over the world and dashed hopes that the recovery of 2021 would continue. Instead, the inflation and energy shortage problems that emerged during the COVID-19 pandemic were amplified and the year was dominated by crisis management on several fronts: Central banks had to engage in interest rate hikes to try to curb inflation. European governments negotiated no fewer than nine sanctions packages against Russia while addressing the threat of an acute energy shortage. And households had to gracefully accept both declining real wages and falling asset values.
But while a lot of things went wrong, there was no lack of bright spots. At an early stage, soft indicators from both businesses and households began pointing towards recession, yet hard data showed impressive resilience. Economic growth and labour markets surprised on the upside, and when the year was over the expected deceleration had not arrived.
This creates a very interesting situation as we now head into 2023 and as the economic drama of the past years is approaching an end. We still expect the global economy to slow down, but how bad will it get? Forecasters around the world have alternated between optimistic hopes of a benign soft landing and dystopian predictions of a deep recession. Our view is that most evidence suggests a recession after all and that many Western countries will have to settle for growth around zero or even below.
At the same time, we are pleased that solid improvements in the energy field will allow the worst-case scenarios for Europe to be more or less written off. Inflation has now probably passed its peak in Europe and has already fallen significantly in the United States − contributing positively to the overall situation, since central banks will thus soon be finished with their key interest rate hikes. This will create opportunities for recovery in both the economy and financial markets during the second half of 2023. One important piece of the puzzle is how China will perform − now that the country has rapidly dismantled its strict COVID strategy. There are many indications that things will go well, but there are risks. As for financial market performance, there are many intriguing questions: Will last year’s US dollar dominance be seriously challenged? And will the world’s stock markets get their revenge, or do we have another gloomy year ahead of us? Looking further ahead, it will soon also be time to start asking what lessons we can learn from this crisis, and especially the sharp reversals in economic policy.
There are many exciting questions, and we look forward to following them together with you during the year.
This January 2023 issue of Nordic Outlook includes four theme articles that discuss the following issues:
- China’s reopening
- US climate policy
- A burden on households
- Fading energy crisis
We wish you pleasant reading!
Nordic Outlook January 2023 (pdf)
Jens Magnusson
Chief Economist
Håkan Frisén
Head of Economic Forecasting