A potential second spike in headline inflation can be expected in both the United States and eurozone, driven by another jump in global commodity prices related to the war in Ukraine or China’s economic reopening, thereby triggering a more aggressive tightening cycle.
The monetary tightening by the two major central banks – the Federal Reserve and European Central Bank – could narrowly avoid prompting a global recession in 2023, says the Economist Intelligence Unit (EIU).
However, a tighter monetary policy by both the banks would prompt a more severe decline in asset prices and a collapse in consumer spending. This could result in a deep global recession according to EIU’s “Global Monetary Policy 2023” report.
Other central banks in both the developed and emerging world would be forced to follow suit, thereby increasing debt pressures.
An additional risk could come from the Bank of Japan (BoJ, Japan’s central bank), whose monetary policy decisions will also be significant for investors in 2023.
The BoJ could make further yieldcurve adjustments in 2023. This will attract Japanese capital from overseas markets into Japanese government bonds and other yen assets.
Since Japan is the world’s largest creditor, a shift towards policy normalisation by the BoJ could send a ripple effect through globalfinancial markets, pushing up borrowing costs, especially in the United States and eurozone, and raising the risk of a global recession.
Economic stagnation in the United States and eurozone in 2023 will be offset by firmer growth elsewhere, particularly China. However, significant risks to this outlook persist, primarily related to inflation, it adds.
