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SCMP Series
What will the global economy look like in 2023?
6 of 6
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2023 could be a year to remember as investors’ appetite for risk returns
An employee works on the assembly line of Great Wall Motors in Chongqing on September 22. China’s expected recovery should be a blessing for global recovery and world trade growth in 2023 as economic activity speeds up again. Photo: Xinhua
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Expect a bumpy 2023 as central banks face high inflation and low growth
US Fed chairman Jerome Powell speaks at the Brookings Institution in Washington, DC on November 30. Investors are concerned that the central bank’s resolve to keep raising rates could tip the economy into a recession. Photo: Bloomberg
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China’s economic recovery plan? Expect a big push for domestic demand
Illustration: Stephen Case
4
What trends will shape the global economy in 2023?
People pose for selfies outside a popular bakery in Beijing on December 28. China says it will resume issuing passports for tourism in another big step away from pandemic controls that isolated the country for almost three years, setting up a potential flood of Chinese going abroad for next month’s Lunar New Year holiday. Photo: AP
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Liquidity crisis could be global financial system’s ‘silent killer’ in 2023
An employee of the foreign exchange trading company Gaitame.com works in front of a monitor showing a graph of the Japanese yen exchange rate against the US dollar at its dealing room in Tokyo on December 20. Photo: Reuters
6
Five market indicators investors should watch in 2023
Pedestrians pass the New York Stock Exchange (NYSE) in New York, US, on January 3, 2023. Photo: Bloomberg
Pedestrians pass the New York Stock Exchange (NYSE) in New York, US, on January 3, 2023. Photo: Bloomberg
Opinion
The View
by Richard Harris
The View
by Richard Harris

Five indicators to watch in 2023 that may impact your investment choices

  • This year may prove less disastrous for bond and equity markets than 2022, but the need to bring down inflation by raising interest rates has not gone away
  • While the outlook is confusing, there are some useful gauges to keep within sight, including interest rates, employment levels and property prices
Richard Harris
Richard Harris
Why you can trust SCMP
“The virtuous circle will turn vicious” was the prediction made by this column at the end of 2021. We can’t claim to be a soothsayer for it seemed evident that 2022 would show that what goes up will come down.
Since 1871 there has been no year in which both global bonds and equities have fallen quite so much. We’ve seen those markets lose US$30 trillion in value in just one year – that’s the equivalent of the annual output of nearly two US economies.
The S&P 500 fell a fifth, as did Chinese stocks. Nasdaq lost a third, while Meta (Facebook), Tesla and Bitcoin dropped by two thirds. Elon Musk’s venture into Twitter already looks like his Waterloo. Global bonds were down 16 per cent after never having fallen into double figures. The sectors that did well, like the 8 per cent surge in the US dollar index, merely highlight the general distress.
The UK’s FTSE 100 index was one of the few in positive territory after Vladimir Putin’s war supported the market’s energy, mining, and pharmaceutical stocks – not to mention the nearly 12 per cent fall in the pound.
And yet, by year-end many analysts were talking the markets up, saying they had recovered in the fourth quarter of 2022, and that the Fed slowing interest rate rises and high inflation meant employment. It may be that 2023 won’t repeat the absolute falls of last year, but we may see something worse than blood on Wall Street: a crisis in Main Street.

It’s all terribly confusing. To help investors benchmark themselves, here are five “cut out and keep” indicators to spot in the dominant narrative of 2023. Forewarned is forearmed.

Traders on the floor of the New York Stock Exchange (NYSE) in New York, US, on January 3, 2023. Photo: Bloomberg
First, inflation will stay high. Inflation was the big narrative for 2022, as this column predicted – and will be for 2023.

Not many remember the pain of high inflation, unless you can remember president Ronald Reagan saying in 1981, “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man”. Yet in the last decade central banks have pressed repeat on “borrow or print money” to fund governments as they hit the “spend” button. The inflation indicator for investors this year will be whether global authorities can retain credibility in the light of that policy.

Second, interest rates will go up. Inflation has hit double digits in Europe and high single digits in the US. In Hong Kong, if my supermarket price matching is any guide, prices have risen by 20 per cent. The Fed cannot conquer 8 per cent inflation with 4 per cent interest rates. It has to get closer to parity, but if it raises rates, it will cause recession. If it lowers rates, inflation will run wild.

If by some fluke the Fed, like Goldilocks, sets rate levels just right, we must still face interest rates and inflation levels much higher than anyone under 40 has experienced. My recent mortgage statement shows a rise of 20 per cent – the first rise in maybe two decades.

That jump in most people’s largest expense overshadows any rise in energy costs or supermarket bills. Investors need to spot whether this becomes headline news in the next six months.

The Federal Reserve building in Washington, US, on December 30, 2022. Photo: Bloomberg

Third, unemployment will go up. We currently have full employment in the major economies, but high inflation leads to high unemployment because everyone in the economy will be looking to cut costs. Unproductive labour will drive up government spending, debt, and – you guessed it – interest rates. The metric to monitor is how fast we go from low unemployment to high.

Fourth, property will be hit – initially, at least. Inflation is good for real estate; rising interest rates are bad. How these two factors work together will determine where property prices go.

Those who have a lot of debt are likely to be looking to raise cash by liquidating assets and that means real estate prices fall, but if inflation is stubborn, it is worth taking a bet to stay in and pay the higher interest rates, and hope that the “J” curve bails you out.

Fifth, events will change your plans. “Events, dear boy” was the response by UK prime minister Harold Macmillan when asked what concerned him. Markets do not worry about known known events, and a little more about known unknowns; it is the unknown unknown events that trigger damaging progressive market falls.

What will the global economy look like in 2023?

The pandemic arrived in 2020, the Ukraine war in 2022. Investors will have to be active. This will not be a year to relax on a beach and clip the coupons.

Lastly, there is one bright spot. That is China, as it recovers from its Covid-induced slump. Judging from the US and European experience, big economic declines in the lockdown quarters were followed by equally big recoveries. We should expect the Chinese economy to do the same.

Hong Kong may even be regarded as an option on the Chinese economy, doing worse in the bad times and better in the good. This recovery is a tactical catch-up because a slowing global economy will not help Chinese growth, but every dark cloud has a small glitter of tinsel.

Richard Harris is chief executive of Port Shelter Investment and is a veteran investment manager, banker, writer and broadcaster and financial expert witness

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