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Identifies labor markets, energy transition, and China's socioeconomic evolution as key factors
WILMINGTON, Del., Dec. 7, 2022 /PRNewswire/ -- Wilmington Trust today released its 2023 Capital Markets Forecast (CMF) -- "Inflationary Vortex" -- which identified several key headwinds for the global economy heading into the new year, including continued pressures in a tight labor market; the transition to clean energy; and China's socioeconomic evolution.
The report, authored by Chief Investment Officer Tony Roth and his team, forecasts the potential for a short-lived, mild recession beginning in Q2 of 2023 followed by an economic rebound shortly after.
As part of the CMF, Wilmington Trust announced its investment positioning for the new year, maintaining balanced exposures across asset classes, sectors and factors, while maintaining the same level of cash reserves.
"The post-pandemic world has unleashed massive, lasting changes to the economy and supply chain, and we can expect short- and long-term impacts. Assessing the balance of these inflationary forces is critical for policy, rates, and investment strategy," said Roth. "We have been living in a decade of low inflation, rates and monetary policy, and for the moment, we will not be going back to the economy we had before the pandemic. "
The 2023 CMF says inflation will continue to largely define and shape the global economic landscape and financial market performance in 2023, structurally driven by:
- Labor Market – Wilmington Trust expects a slight upward movement in the unemployment rate, including limited nationwide net job losses, with pressure lasting into 2024 and 2025.
- Energy Transition – With efforts to transition away from fossil fuels and toward renewable energy, production will likely slow before investment in renewables catches up, leading to limited supply.
- China – Having experienced sustained growth over the decades, China has become an omnipresent economic force with wide-ranging implications for inflation. Its policies will have both short-term and long-term impacts on the global economy.
"The factors that drove inflation will be drastically different than last year, but we can expect a continued impact on the economy, which is reflected in this outlook," Roth added.
Wilmington Trust expects the 2023 recession to be short-lived, given the fact that it is already priced into the markets and the U.S. economy will likely rebound shortly after.
However, as we enter the first half of 2023, Wilmington Trust expects a slight upward movement in the unemployment rate, including limited nationwide net job losses. The sources of labor market tightness include:
- Reduced labor participation due to a range of pandemic-related behavior, especially early retirement
- Lower productivity attributable to a reluctance to work "harder," or more hours than is required, recently called out as "quiet quitting"
- Low population growth, particularly from immigration, that traces to both the pandemic as well as domestic political forces in play before COVID-19 compounded the immigration headwinds.
The reduction in the labor force will likely reduce the U.S. economy's potential gross domestic product given the strong level of aggregate spending and recent Fed policy has directly impacted job losses in the housing sector, while overall market weakness has led to tech company losses. The firm anticipates both trends are likely to continue in the short term, and the overall labor pressure lasting into 2024 and 2025 at less intense levels.
The 2023 CMF contends that a significant future inflation driver will be created by the efforts to transition from a hydrocarbon-based energy economy to one powered by renewable sources. There will be three drivers of the energy transition: first, a reduction in capital expenditures (capex) and output by the petroleum industry; second, a surge in demand for vital, non-hydrocarbon commodities; and third, U.S. federal policy.
Wilmington Trust expects a decline in petroleum supply — prior to the development of a commensurate increase in renewables — to drive crude prices higher to a degree that has historically been shown to have an enduring, multiyear impact on overall inflation.
Additionally, non-energy commodity price increases have customarily been passed through to intermediate producers as well as to consumers. If this pattern holds true for key commodities within the green energy supply chain, they project that this will result in a second material source of inflation.
Lastly, public policy pushes prices of certain items higher through a "green premium," and the prospect of higher deficits to support renewable technologies is an inflation risk.
Wilmington Trust expects the Chinese economy to have a lasting impact on inflation.
Business in China has grown greatly over the decades to become an omnipresent economic force with wide-ranging implications for global inflation. In the short term, the country's zero-Covid policy and geopolitical tensions are key for global supply-side-driven inflation.
In the long term, Chinese policymakers' will be focusing on elevating its middle class and transitioning from a manufacturing-led to a service-led economy, to promote higher-paying service jobs. Even if corporations can extricate themselves from China's supply-chain grip, moving to other parts of the world will likely create redundancies within manufacturing and R&D, and may further add to costs and inflation.
To read the report in full visit https://www.wilmingtontrust.com/cmf2023
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