Janus, the Roman god of beginnings and transitions, has two faces: one looking to the past, one to the future. January is the month named after him. As prospects for the global economy and financial markets are evaluated at the start of 2023, a look to the past can help us assess what the future may hold. However, with 2022 having been a year of highly unusual events – China’s zero-Covid approach, the Russia-Ukraine war and the rapid rise in interest rates – circumspection is in order.
China in the world
In China, the pre-Covid era was a strong and stable one. Economic growth ran at around 6-7% at an annualised rate between 2015 and 2019. Certainly, there were concerns about the veracity of that data and various measures sought to provide a more reliable indication. But even so, the gyrations of growth from 2020 to 2022 were particularly astonishing.
Looking forward, the issue is whether China can return to its former performance and once again provide a meaningful contribution to global growth. A stronger contribution from China would indeed be welcome. Advanced economies are at varying degrees of recession risk, with the chances highest in Europe. China’s re-opening of its economy provides some grounds for optimism that it can return to its former role, although the limited efficacy of China’s home-produced vaccines and the absence of broad immunity pose the risk of renewed economic dislocation. Worker shortages due to sickness are already widely reported, with disruption to the global supply chain likely throughout 2023. In the short-term the mass travel associated with Chinese New Year, starting on 22 January, poses a significant risk.
To help support growth, China can ease policy further, especially as inflation has remained subdued. That is in sharp contrast to the advanced economies where inflation rates are still close to 10%. The good news for advanced economies is that there is some evidence, especially in the US, of wage growth moderating. The risks of a wage-price spiral may well have been exaggerated.
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