Look to emerging markets in transitional year
text size

Look to emerging markets in transitional year

We believe 2023 will be a transitional year, the next stage following the "low-rates, low-growth" years of 2010-19 and the "Covid years" of 2020-22, where the pandemic led to a global lockdown, massive fiscal spending, skyrocketing debt and the great reflation.

In the transitional year of 2023, the global economy will have three characteristics. First, global economic growth will decline significantly. Growth is diverging between developed and emerging market (EM) economies, with the former threatened by severe stagflation, or at least mild recession, while the latter will see slower economic growth, but a lower chance of a severe recession.

The second trait concerns inflation. We believe global inflation, especially in the US and several EM economies, has already peaked. Our global inflation heat map shows the average inflation rate for the 42 countries studied peaked in June and has come down steadily since.

In 2023, the inflation rate will be lower globally off a high base and reduced worldwide demand due to the economic slowdown.

The third trait we predict relates to interest rates. We believe interest rates in developed countries (especially the US) will overshoot to tame high inflation rates. But central banks in EM countries will not rush to raise rates. This will cause interest rates for the two groups to converge in the latter half of next year.


If the US economy continues to grow well, especially in terms of retail sales, we hypothesise household spending will remain positive despite dim economic prospects because of excess savings from Covid stimulus measures during the Trump and Biden administrations.

We calculated the difference between current savings and where savings would have trended without government assistance measures. By our calculations, if we assume savings typically grow about 6% per year, US savings as of October 2022 would be about $15.6 trillion, while actual US national deposits are $17.6 trillion. This shows an estimated $2.1 trillion in excess savings, down from a peak in January 2022 of $3.06 trillion.

We expect the excess savings to be completely spent by mid- to late-2023, which will help keep the level of consumption stable, but the composition of consumption will change from luxury goods and services to necessities. In short, we believe the excess savings will help soften the severity of the US economic slowdown in 2023.

In terms of inflation, we believe continued declines in consumer confidence will reduce consumption, especially of luxury goods and/or various services, which will reduce inflationary pressure to some extent going forward.

With inflation passing its peak and the coincident and leading economic indicators such as consumer confidence and purchasing managers' index starting to decline, we believe the Federal Reserve will start to slow its rate hikes from the December meeting. With three more rate hikes, we believe the terminal Fed Funds Rate will be 4.88%.

At 4.88% (a 100-basis-point increase from November 2022), the 30-year mortgage (November 6.6%) and credit card rates (November 18%) will be at least one percentage point higher they are now. This will cause financial difficulties for those with mortgages and/or credit card loans. Furthermore, the financial cost for the US private sector will be higher.

Total US corporate debt accounts for 80% of GDP compared with 65% in 2007. One-third of corporate debt in America is rated BBB, the lowest investment grade. We believe rising rates will lead to a downgrade of credit ratings for many companies, resulting in a lack of liquidity and financial turmoil.

Hence, we believe the Fed will subsequently lower its benchmark rate faster than the market expects, possibly in the third quarter of 2023.


In China, we expect a modest rebound in full-year growth to 5% in 2023, thanks to the end of its zero-Covid policy in the second quarter and stabilisation in the property market, with a stronger private consumption recovery relative to investment. The augmented fiscal deficit will narrow but remain sizeable at 10.2% of GDP, with the bulk of debt financing likely front-loaded in the first half of 2023 to sustain infrastructure capital expenditure.

With a gradual reopening in terms of pace, China will unleash pent-up demand. From our calculations, China has excess savings equal to 5.86 trillion yuan or 3.4% of GDP. This excess savings will revive consumption and the domestic economy in 2023.


In the eurozone, we foresee stagflation in 2023, predicting a contraction in activity because of the ongoing energy crisis and tightening monetary policy, with inflation remaining well above target in both 2022 and 2023.

Eurozone inflationary pressures are likely to increase more than previously expected because of rising energy prices in line with futures contracts, as government subsidy measures begin to be limited; inflation becoming more diffuse; and labour unions gaining more bargaining power in a relatively tight labour market. It is highly possible Europe will experience stagflation in 2023, especially in parts of Eastern Europe that have fewer gas reserves.

In short, in this transitional year the global economy will slow and become more divided, with EMs outperforming developed markets and inflation peaking, while developed world interest rates will accelerate and must begin to decline in the second half. This should bring interest rates between developed and developing countries closer together towards the end of the year.

Dr Piyasak Manason heads the Wealth Research Department at InnovestX Securities Co Ltd

Do you like the content of this article?