The first quarter of 2023 ended with the failure of two US banks and the sudden acquisition of Credit Suisse by UBS. Most likely, these were idiosyncratic events and the relevant authorities have managed, for the time being, to avoid contagion to the rest of the financial system. However, concerns have not been fully dispelled and they are likely to linger for the remainder of 2023. Meanwhile, financial markets’ previous worries about inflation, the resilience of global growth and geopolitical tensions remain. Attention will undoubtedly return to these. In the post-pandemic world, the global market spotlight has shifted, often rapidly, from one concern to another. We expect that pattern to continue.
A quartet of concerns
This quartet of concerns – financial stability, inflation, growth and geopolitics – is, of course, nothing new. There is scarcely a year without one being in the headlines. Policy, regulation and co-operation can mitigate the risks from each of these sources, but clearly there are limits to the extent to which they can be managed.
Financial stability
National and global rules and regulations are in place to support financial stability. For banks, these were tightened after the global financial crisis, requiring higher levels of capital and liquidity. Overly-burdensome regulation is often criticised by those being regulated. Yet, the structure in place was insufficient to prevent the failure of SVB in March 2023.
Inflation
The price and yield of a thirty-year bond depends on expectations of interest rates (and, hence, inflation) over thirty years ahead. That is a long period and such expectations cannot be held with any great degree of confidence. However, such expectations were well anchored, until recently, as central banks targeted, and successfully achieved, low inflation. Their commitment to low inflation remains. In the US, a higher inflation target has been suggested by some. Now, with inflation rates falling in the major advanced economies and generally expected to be much lower by the end of the year, it does not seem an appropriate time to move the goalposts.
Recession concerns
In the main advanced economies, economic growth has remained relatively stable and positive, showing no signs, as yet, of recession. China’s reopening is one of the three main factors supporting global growth this year. There, as elsewhere, excess savings built up in the pandemic can be run down to support consumer spending, the second support for growth. Global excess savings amount to almost USD 5 trillion, according to our estimates. Third, capital spending is being increased in three main areas: on green infrastructure; defence spending; and building new capacity as production is reshored.
Geopolitical tensions
Geopolitical tensions have, according to one measure eased, although they still remain above their long-run average level. Of course, future prospects are difficult to gauge, but easing tensions is one of our key themes for 2023.
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