Global outlook summary The global economy in 2023: A recession by any other name Beating back inflation Global macro and financial market conditions In our 2022 economic and market outlook, we today and those anticipated in the coming outlined how we believed the removal of policy months are similar to those that have signaled accommodation would shape the economic and global recessions in the past. Energy supply-and- financial market landscape. Policy has in fact demand concerns, diminishing capital flows, driven conditions globally in 2022, one of the declining trade volumes, and falling output per most rapidly evolving economic and financial person mean that, in all likelihood, the global market environments in history. But one fact has economy will enter a recession in the coming year. been made abundantly clear: So long as financial Central banks generally seek to avoid a recession. markets function as intended, policymakers are Inflation dynamics mean that supply-side price willing to accept asset price volatility and a pressures on inflation are likely to reverse in 2023. deterioration in macroeconomic fundamentals However, policymakers must tighten financial as a consequence of fighting inflation. The conditions to stop high inflation from becoming normalization of consumer behavior, stabilization entrenched into the decision-making of households of supply pressures, and rapid monetary tightening and businesses. That said, households, businesses, suggest a more challenging macroeconomic and financial institutions are arguably in a better position to handle an eventual downturn, to the environment in 2023 that, in our view, will help extent that they have stronger balance sheets. bring down the rate of inflation. All recessions are painful, and we expect the length and depth of the recession in 2023 to Global inflation: Persistently surprising vary by region. Inflation has continued to trend higher across Our base case is a global recession in 2023 most economies, in many cases setting brought about by the efforts to return inflation multidecade highs. The action taken, and likely to to target. Whether history views the 2023 be taken in the months ahead, by central banks recession as mild or significant matters little for reflects a promising effort to combat elevated those affected by the downturn. But failing to inflation that has proven more persistent and act aggressively to combat inflation risks harming broad-based. Supply-demand imbalances linger households and businesses through entrenched in many sectors as global supply chains have yet inflationary pressures that last longer than the to fully recover from the COVID-19 pandemic and pain associated with any one recession. as demand is supported by strong household and As the table below highlights, growth is likely to business balance sheets buoyed by pandemic-era end 2023 flat or slightly negative in most major stimulus. The war in Ukraine continues, threatening economies outside of China. Unemployment is another surge in energy and food commodities likely to rise over the year but nowhere near as prices. Effective monetary policy requires good high as during the 2008 and 2020 downturns. decision-making, good communication, and good Through job losses and slowing consumer luck. The current backdrop is missing the good- demand, a downtrend in inflation is likely to luck component, posing a challenge for persist through 2023. We don’t believe that policymakers whose fiscal and monetary tools central banks will achieve their targets of 2% are less effective at combating supply shocks. inflation in 2023, but they will maintain those targets and look to achieve them through 2024 and into 2025—or reassess them when the time is right. That time isn’t now; reassessing inflation targets in a high-inflation environment could have deleterious effects on central bank credibility and inflation expectations. 4