We come into 2023 with an outlook for the global economy that is more optimistic than consensus, says Evan Brown, Head of Multi Asset Strategy Investment Solutions at UBS Asset Management in his latest Macro Monthly. The economy will bend, as the lagged effects of substantial monetary tightening filter through into the economy. But the economy will not break, as nominal and real incomes remain resilient. Moreover, 2022’s headwinds – Europe embroiled in an energy crisis, and zero–COVID-19 policies weighing on Chinese activity – are shifting to be tailwinds for global growth in the first half of this year.
Still, a better-than-expected economy is not all good news for all markets. Resilient labor markets means wages stay elevated, meaning central banks keep rates elevated for some time. Higher rates for longer means ongoing de-risking in more expensive equity markets, namely the growth-biased US market. When it comes to taking risk in 2023, we prefer to pick our spots, allocating capital where cyclicality is more pronounced, like China. In our overall allocation, we prefer high grade credit over equities entering the year, as higher all-in yields have shifted the relative attractiveness for risk assets.
Macro view
The US consumer is the lynchpin of the global economy. Real spending in the US increased at a solid pace in 2022 despite surging inflation thanks to elevated levels of excess savings and strong nominal wage growth. In 2023, the US consumer starts the year with an extra boost in the form of much lower gasoline prices compared to mid-2022.
We do not anticipate a significant deterioration in the US job market – a prerequisite for a retrenchment in real consumption – to happen any time soon. Resilience in the services sector has kept a host of labor market metrics (including payrolls, wage growth and initial jobless claims) at very robust levels even amid some softening in goods sector activity as well as layoffs in the technology sector. Excess savings will be depleted for lower income households, but high-income earners, who are the biggest spenders overall, continue to spend in the services sector. Consumers and businesses have had the opportunity to term out debt at extremely low interest rates, making them less rate sensitive than has historically been the case. Higher social security payments and fiscal transfers from state and local governments should also cushion the economy.
Here you will find the complete Macro Monthly from UBS Asset Management.