The world is going through challenging moments. So far, the Fed has indicated that it will continue with its aggressive strategy despite the consensus that it is just a matter of time before the milled recession starts.
But according to UBS asset management and JP Morgan, the American economy may defy the bearish consensus and is likely to deliver positive surprises. Already, prices are easing, signaling the peak of inflation.
So what are the biggest threats to the US economy in 2023?
Before pointing out the threats the US economy faces, it is vital to answer the question what is GDP? GDP or Gross Domestic Product measures the market value of a country’s finished goods and services. As such, the biggest threats to the US economy are Chinese policies.
But whether the US economy will grow depends mostly on internal factors. After all, foreign trade only contributes 25 % of the US GDP. Therefore, what happens in other countries is unlikely to impact the US economic growth in 2023.
However, China remains an important trading partner to the United States. Thus what happens there is critical to the US Economy. However, the impact will be minimal if China pursues policies that avoid a generalized lockdown.
Elsewhere, speculations are rife that it is just a matter of time before China invades Taiwan as Russia did in Ukraine.
If it comes to pass in 2023, the world economies, including the US, must brace themselves for more challenging times. The shock waves are likely to be felt globally but will be severe in the US.
Elsewhere, the cryptocurrency fire that started burning in 2017 shows signs of extinguishing. The market is expected to remain volatile in 2023.
In China, things don’t look good. The resurgence of coronavirus is likely to wreck the country’s economy and impact the rest of the world.
Predictions
The Deutsche Bank AG has predicted that the S&P 500 index will likely rise to 4500 in the first six months of 2023, fall by the third quarter, only to bounce back to 4500 before the end of the year.
Thus, anyone investing in bonds is likely to make easy money. According to USB Group, the US 10-year yield will drop below 2.65 percent by the end of 2023.
Morgan Global research has predicted the following:
The global economy will expand at 1.6% in 2023. The causes of this sluggish growth include tightened financial conditions, Covid 19 policy, and Europe’s gas problem.
The world economy will not collapse after all because inflation is declining. S&P 500 will retest the 2022 lows, but it will rebound at the end of the year.
Note that 2022 was challenging for the US and the world. The global economies registered the deepest downturn in the first two quarters. The downturn resulted from supply and demand problems, the war in Ukraine, and Covid 19.
In 2023, the Fed is expected to pause rate hikes, which have been adjusted close to 500 basis points. As a result, the US is expected to grow by 1%, China by 4.0 %, and the euro area will increase by 0.2%.
The rising cost of borrowing has depressed housing activities, and the tightening credit conditions are likely to generate stress to threaten the microeconomic stability the world has been enjoying.
The onset of winter will worsen China’s COVID problem, while Europe’s natural gas crisis will likely depress European markets.
Covid19 and high inflation have eaten into consumer savings, so the adverse effects continue to broaden in almost all assets, including bonds, equities, and crypto. So consumers are expected to cut back on capital investment and discretionary spending.
Final Thoughts
Despite all these issues, the global economy is unlikely to slide into recession in 2023. JP Morgan believes that the US is likely to slide into recession before 2024 ends.
As a result, the labor market is expected to contract, increasing the unemployment rate to about 5%. Thus, in the first half of 2023, S&P 500 is expected to fall but will rise to about 4200 by the end of the year.
So the US economy is likely to slide into recession, but the Fed’s counter-strategy will determine the length of the recession. Also, the market volatility is expected to continue, and its index will remain hinged around 25.
