Eight key global macro themes for 2023

Cedric Chehab, Global Head of Country Risk at Fitch Solutions Country Risk & Industry Research, outlines key themes that will shape the coming year.
Cedric Chehab
Cedric Chehab
Global Head of Country Risk, Fitch Solutions

At the end of 2022, we identified eight major economic and political themes that will shape 2023. As we have seen over the past two years, the outlook can change rapidly given unforeseen and volatile events. We are moving from a period in which one or two major risks dominate (such as the COVID-19 pandemic or Russia’s invasion of Ukraine) to a period in which there will be a multiplicity of smaller-scale risks. This creates more idiosyncratic problems for the global economy as well as individual economies.

These, for example, could include the greater presence of smaller-scale domestic and geopolitical security risks as well as hidden pockets of leverage within the financial sector (such as with crypto exchanges or asset managers) which could become exposed by elevated interest rates and weakening economic fundamentals. Here, we outline some of the major themes. We have not included the Russia-Ukraine war as a theme in itself because we anticipate that the conflict will continue throughout 2023, with neither side achieving a decisive victory.

Theme 1: Sharp slowdown in global growth, but nuances exist

We expect that global real GDP growth will slow from 3.1% in 2022 to 2.0% in 2023. Other than the pandemic in 2020, this would mark the slowest pace of growth since the GFC. Developed markets (DMs) will be hit hard, with a painful recession in the eurozone as well as a light and short recession in the US. Europe will be the region that suffers the most, contracting by 0.6% in 2023 (the eurozone will contract 0.5%) given rising interest rates, the ongoing energy shock, and a sharp decline in business and consumer confidence.

A contraction in output in developed Europe, combined with elevated inflation elsewhere, will also weigh on emerging Europe, where we expect that output will contract by 1.1% in 2023. We forecast that the US economy will slow to 0.3% over 2023 as a whole and will see two consecutive contractions in output in the latter part of 2023 as well as a rise in the unemployment rate. 

Theme 2: Inflation will ease slowly, leading to still-tight monetary policy

While leading indicators such as commodity prices, shipping rates and inflation expectations all point to weaker price growth, it will take a while for headline inflation to reach central bank targets. While inflation will trend lower over 2023, it is unlikely to hit central bank targets over the next nine-to-12 months in most economies. Inflation will remain sticky in those economies that have been hit by large supply shocks, such as European economies and, in particular, in emerging European economies that depend on a high level of imported energy, food and staples. The pickup in growth in China could see commodity prices surprise on the upside in 2023, which could further slow the decline in inflation rates.

Theme 3: Fiscal policy will tighten

We expect that fiscal policy in most major economies will tighten in 2023 due to three main reasons: 1) Governments rolling back emergency spending plans launched in 2022 (Germany, China) 2) Higher bond yields and greater pressure by market forces (UK, Italy), and 3) A greater focus on fiscal consolidation by legislators (US).

In aggregate terms, government spending will fall by 1.0% of global GDP. Among major economies, we expect the most tightening in China (where 2023 spending was frontloaded into 2022), Germany (where spending temporarily surged in 2022 due to economic support measures), Russia (where the economy will continue to contract) and the US (where the fiscally hawkish Republicans now control the lower house).

Theme 4: US dollar is not a one way bet anymore

A combination of factors saw the US Dollar Index appreciate by 11.0% over 2022. While we believe that many of these factors will remain in play over the coming months, the US dollar will struggle to maintain its uptrend over 2023 and instead will likely peak, if it has not already. The major driver of the US dollar in 2022 was an increasingly hawkish Fed as well as rising geopolitical risk, particularly Russia’s invasion of Ukraine. However, there are several reasons why we believe that the US dollar will not be able to repeat its performance in 2023.

Theme 5: Fragmented parliaments will stymie policymaking

In 2023, increasing risks of protests and rising divisions between executives and legislatures will make policymaking more difficult. A combination of dissatisfaction with economic conditions and busy election cycles have already cost several governments their majorities in parliament in 2022, including in the US and France.

Elsewhere, other internal tensions have led to major legislation being delayed, such as Germany’s new, modestly more generous social welfare system. In terms of EMs, despite winning the presidential race in Brazil, President Luiz Inácio Lula da Silva's party does not have a majority in congress, and the November 19 2022 election in Malaysia resulted in a hung parliament. These difficulties are reflected in our proprietary Short-Term Political Risk Index (STPRI), which continues to trend downwards across all regions on a GDP-weighted basis. Among large markets, this has weighed on European and Latin American markets in particular, the majority of which have experienced large negative revisions to their STPRI scores.

Theme 6: Tensions between the US and mainland China increase

We anticipate that tensions between the US and China will increase in 2023 as the newly Republican-controlled House of Representatives raises pressure on the Biden administration to adopt tougher stances on Beijing, and the latter responds accordingly.

First, we believe that Congress will press for greater US support for Taiwan, China by means of the proposed Taiwan Policy Act of 2022 (which aims to provide greater security assistance for the market) and the US-Taiwan Initiative on 21st Century Trade (which aims to increase two-way trade and investment). Second, the Biden administration is likely to strengthen its alliances with Japan, South Korea, the Philippines and Australia to counterbalance Beijing’s influence in the Indo-Pacific region. This will complement initiatives such as the new Indo-Pacific Economic Framework for Prosperity, which includes 12 Asian markets. Third, the US is likely to introduce further restrictions on high-tech goods exports to China the competition between the two markets over semiconductors and next-generation technologies increases. Fourth, the Republican party is likely to raise the rhetoric against China, which, even if does not immediately affect policy, is likely to create a more negative.

Theme 7: Global property markets come under pressure

After a decade of rapidly rising residential property prices in most DMs, there are indications that the
global housing market is losing momentum. This is the result of monetary tightening, which is raising the
costs of servicing mortgages and, which will in turn squeeze the budgets of consumers who are already suffering from falling real wages. To the extent that a buoyant property market acts as a means of supporting the economy, a downturn will add to the macroeconomic headwinds. Housing market activity matters for the wider economy for a number of reasons.

First, housing market turnover supports associated activity such as outlays on household goods. Second, in many DMs, consumers are able to borrow against the rising value of their property, which supports consumption (so-called mortgage equity withdrawal).

A third issue is that falling house prices have a particularly adverse effect on consumers the more highly leveraged they are, particularly in an environment where households are subject to variable mortgage rates or where mortgages are fixed for relatively short periods. This is a particular problem for markets such as Australia and Canada. Finally, weak housing activity discourages residential investment, which has a direct impact on GDP growth. For all these reasons, a softening in housing market activity and prices will pose downside risks to DMs in 2023.

Theme 8: Unemployment rates increase, but less than In previous cycles

We anticipate that labour markets will weaken in 2023 as economic activity softens, reversing a tightening trend that started in late 2020. That said, unemployment rates will not rise as much as they have in past economic cycles, going some way towards mitigating the impact of a weaker global economy on households and businesses. For example, we forecast a 0.7 percentage points  rise in the US unemployment rate to 4.5% by the end of 2023, which would be a significantly lower increase than in past recessionary cycles. Looking at the last two (pre-pandemic) recessions, the US
unemployment rate rose by 1.8 percentage points to 5.7% between 2000 and 2001 and by 2.6 percentage points to 9.9% between 2008 and 2009.

Below-normal labour force participation rates in the US and the UK have been a key contributing factor to tight labour markets and a lowering of unemployment rates over the past two years (see chart). US labour force participation rate dropped from 63.4% in early 2020 to a low of 60.2% in April 2020 before rising gradually to reach 62.2% as of October 2022. Likewise, in the UK the participation rate dropped from 64.4% in February 2020 to 62.9% as of September 2022. Still-generous spending by governments could also help to prevent a larger weakening of the labour market, particularly if direct transfers similar to those seen during the pandemic are provided to businesses.

This commentary is published by Fitch Solutions Country Risk & Industry Research and is not a comment on Fitch Ratings' Credit Ratings. Any comments or data are solely derived from Fitch Solutions Country Risk & Industry Research and independent sources. Fitch Ratings analysts do not share data or information with Fitch Solutions Country Risk & Industry Research.

More BUlletin Publications

Digitalisation as a business leadership imperative


Digitalisation as a business leadership imperative

Technology-driven trade and client interaction are nothing new. But increasing investment in digitalisation of fundamental business processes and decision making is driving a new way of looking at trade finance and risk underwriting. Authors highlight successes and challen...

Mobilising Africa's Potential


Mobilising Africa's Potential

Despite the challenges there are many positive opportunities emerging for Africa today

Curated by the BU Sub-Saharan Africa Working Group, authors for this special edition of the BUlletin explore areas of growth and the role of different sources of international finance tapping this

Ripples and After-effects


Ripples and After-effects

exploring the multiple secondary impacts of both the pandemic and the war in Ukraine

from sovereign risk in Africa, to energy security, political violence and the private CPRI market

Shocks and Short Circuits: The Rewiring of Global Trade


Shocks and short-circuits: The re-wiring of global trade

The bright shoots of economic growth are under threat once again
Assailed by commodity supply shocks and political instability exacerbated by the war in Ukraine
Contributors this month look at the complex impacts on trade and investment across developed and...

Diverging Risk


Some predict that 2022 may finally bring us beyond the thrall of the COVID-19 pandemic

But the events of past two years have brought significant divergence of risk across economic and geographic boundaries

Authors this month look at how this is playing out in a range of cases

New Foundations


If the global economy is truly on the road to recovery how can we build the surest path to sustainable growth in our new net-zero world?

New foundations in tech, data, and cooperative frameworks may help guide us into the next phase

Illuminating Climate


Now widely recognised as an economic as well as environmental imperative
The momentum to tackle climate change is building
Changing perspectives, policy, products and processes across the export credit industry

In search of claims


Where is the avalanche of claims and insolvencies expected to emerge from COVID-19?
The picture so far is uneven across geographies, sectors and business lines
And for the future? Well, it depends...

Cross-roads for Africa's recovery


The economic impact of the COVID-19 pandemic on Africa has been considerable and the path of recovery depends on maintaining the support of local, regional and international stakeholders. But which approaches can best build upon the opportunities presented by growing intra-regional trade, and investment in sustainable infrastructure?

Navigating the Brave New World of Trade


With the wounds of the pandemic still under triage, a rebound in trade could the best hope for governments and businesses alike.
But trade is under immense pressure from myriad directions.
How can we maintain supply of finance, in the face of growing demand and irregular patterns of risk?

January 2020 BUlletin


Exploring the macro forces impacting trade, 2019 H1 Industry Data Snapshot + Analysis of the Economic Outlook for 2020

September 2019 BUlletin


This edition of the BUlletin juxtaposes themes of change and disorder with the celebration of a number of institutional anniversaries, symbolic of endurance.

• The new dynamics of 'trade in flux' • 100 years of UKEF • ICIEC on Partnerships for Development • Sector Spotlight: Shipping (GIEK) and Pharma (SE...

July 2019 BUlletin


Export Credit and Investment Insurance, Today and Tomorrow

We can see the seeds of the future in digitalisation, automation, applications of block-chain, or machine learning. But what will it mean in practice?

May 2019 BUlletin


Is international financing on target?

This edition of the BUlletin addresses the evolving role of various international financial institutions in generating sufficient risk capital for development projects and in particular investment in critical infrastructure and renewable energy.

Also featuring review of Bern...

2019 Spring Periodical


Spring Periodical with 2018 Year end statistics and commentary, plus results of the 2019 'State of the Industry Survey', conducted jointly with ICISA.

Berne Union Members covered a record USD 2.48 trillion of new business in 2018. At the same time, claims remained elevated at over USD 6 billion, for the forth consecutive year....

August 2018 BUlletin


Innovations in trade technology, e-commerce and insuretech | Rethinking local currency | LMA's new buyer credit facility 

Contributors this month explore diverse themes of innovation, from the foundations of trade in the form of smart ledgers through to new approaches to supporting e-commerce exports and the potential...

July 2018 BUlletin


IWG | 2H 2018 Risk Outlook | Trade Wars | Regulation and more...

Contributors to the July BUlletin explore the development of a new era in export credit, through the lens of proceedings at the IWG; trade wars; sustainability and export finance regulation

April 2018 BUlletin


Themes for this month focus on:

Linking Trade and Economic Growth / Collaborative approaches to Sustainable Development /Wind Financing / Digital Innovation / Venezuela / 

March 2018 Bulletin


By all accounts 2017 was an excellent year for Berne Union members

who once again made a tremendous positive impact on global cross-border trade and investment - providing a record USD 2.35 trillion in cover for cross-border trade and investment and now supporting 14% of total worldwide exports.

September 2017 BUlletin


"small business to big infrastructure – local currency to global economic policy"

Themes for September span the full scale of international finance in a bumper edition, with a selection of 12 articles from Berne Union members and industry experts, painting a telling picture of the relative pressures and priorities in ...

August 2017 BUlletin


"New Horizons: Changing Markets, Evolving Approaches"

This month’s contributors examine three economies seemingly at turning points – Argentina, Iran and the Côte d’Ivoire – considering in each case the forces actively influencing the trade environment and the approach of the financial ...

July 2017 BUlletin


"10 years of SERV, SMEs and Africa"

Commentators this month focus on support for small businesses, local contractors and risk in Africa - including energy sector and analysis of the Mozambique debt crisis. Detailed BU Data Snapshot on Africa and a member survey on approaches to SMEs set the scene...

May 2017 BUlletin


"Claims, Pricing and Regulation"

The first edition of the BUlletin kicks off with a 'State of the Industry' review from Berne Union Secretary General, Vinco David, where he considers three factors which could disrupt the status quo for the export credit and investment insurance industry...