Morgan Stanley Says U.S. May Skirt Recession In 2023, Europe Not So Lucky

Britain and the euro zone economies are likely to tip into recession next year, Morgan Stanley said, but the United States might make a narrow escape thanks to a resilient job market.

At the same time, China’s expected reopening after almost three years of COVID-19 curbs is set to lead a recovery in its own economy and other emerging Asian markets, the investment bank’s analysts said in a series of reports published on Sunday.

“Risks are to the downside,” the reports said, projecting the global economy to grow by 2.2% next year, lower than the International Monetary Fund’s latest 2.7% growth estimate, Reuters cited.

Next year, Morgan Stanley predicts a sharp split between developed economies “in or near recession” while emerging economies “recover modestly” but said an overall global pickup would likely remain elusive. China’s economy was predicted to grow 5% in 2023, outpacing the average 3.7% growth expected for emerging markets, while the average growth in the Group of 10 developed countries was forecast at just 0.3%.

Central banks across the globe have raised interest rates this year to curb raging inflation, and in the United States, Morgan Stanley predicted the Federal Reserve to keep rates high in 2023 as inflation remains strong after peaking in the fourth quarter of this year.

“The U.S. economy just skirts recession in 2023, but the landing doesn’t feel so soft as job growth slows meaningfully and the unemployment rate continues to rise,” the report said, predicting a 0.5% expansion next year.

“The cumulative effect of tight policy in 2023 spills over into 2024, resulting in two very weak years,” the report added.

Globally too, the peak in inflation should come in the current quarter, the analysts said, “with disinflation driving the narrative next year”.

Factors to consider:

U.S. core inflation to fall to 2.9% at end-2023, headline inflation to 1.9%;

Asia growth to dip to 3.4% in 1H23 before recovering to 4.6% in 2H23, fuelled by domestic demand;

Cross-asset returns – especially in fixed income – will look much better in 2023 than in 2022, driven by cheaper starting valuations;

High-grade fixed income to outperform global equities; and EM and Japan stocks to outperform, with U.S. shares lagging.

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