Resources | Market Trends | 28 December 2022

Economic Forecast 2023: 3 Essential Questions for Businesses

We share our economic forecast for 2023, including a look ahead at the recession threat, inflation and interest rate hikes.

woman writing on a whiteboard in a meeting room

We share our economic forecast for 2023, including a look ahead at the recession threat, inflation and interest rate hikes.

If the last few years have taught us anything, it’s that economic conditions can change in ways that nobody foresaw, seemingly at any time.

Even so, there are three questions that will have a huge impact on how difficult the coming year will be for businesses:

  • Will a recession take place in 2023?

  • Will interest rates continue to rise?

  • When, if ever, will inflation return to normal?

Some of the world’s brightest economists and organisations have applied rigorous analysis to each one, producing their economic forecasts for 2023. Let’s break down what the experts think will happen next.

Will a recession take place in 2023?

Opinions are mixed about the chances of a global recession, but Europe and possibly the US are likely to experience one.

As a whole, the world economy will see a growth rate of 2.7%, the International Monetary Fund forecast. India (6.1%) and China (4.4%) are expected to outpace the global average, as are the ASEAN-5 countries of Indonesia, Malaysia, the Philippines, Singapore and Thailand (4.9%).

The Organisation for Economic Co-operation and Development predicted growth will be lower than what the IMF foresees — the OECD says 2.2% — but agreed that a global recession will likely be avoided.

Chris Atkins, C2FO’s president of Capital Finance and Capital Markets, is skeptical of that last prediction. In addition to troubles in Europe and the US, he said, China is facing significantly slower growth, which has in the past acted as a counterbalance to US and European economic softness.

The global economy might not meet the common technical definition of a recession — two quarters of negative GDP growth — but that’s somewhat misleading if inflation outpaces GDP growth. A situation like that, where higher prices erode buying power and show negative real growth (i.e., growth minus inflation), is going to feel a lot like a recession.

The IMF and OECD predictions do come with two important caveats:

Countries representing one-third of the world economy will contract, the IMF reported.

Europe is almost guaranteed to go into recession. In fact, it may already be in one. The European Commission said the EU’s economy would “significantly contract” in the last quarter of 2022 and into the early months of 2023. Runaway inflation — especially in terms of energy prices — and the resulting interest rate hikes have been hard.

Opinions are mixed over the US entering a recession. Morgan Stanley and Goldman Sachs say no, though they acknowledge it’s going to be close. Meanwhile, the Conference Board, J.P. Morgan, Fannie Mae and others say a recession is definitely on its way.

Deutsche Bank predicts a US recession, but not until the third quarter. Roughly $1.2 trillion in excess savings, accumulated over the pandemic, has cushioned households from rising prices — and arguably given a false impression of economic growth. But Atkins fears those savings will be gone by the end of the second or third quarter.

One silver lining for the US: Most economists believe that if the US economy does contract, the downturn will be relatively short and shallow.

Even if it’s technically not a recession, conditions are still going to be volatile.

“In short, the worst is yet to come and, for many people, 2023 will feel like a recession,” wrote Pierre-Olivier Gourinchas, the IMF’s director of research, about this cycle.

Will interest rates continue to increase?

As long as inflation remains high, central banks have signalled their intention to keep raising rates, though the pace and intensity may change in 2023.

In December, the European Central Bank (ECB), the US Federal Reserve and the Bank of England all raised their rates by half a percentage point. That’s less than in recent months, when rates were increased by 75 basis points.

The Reserve Bank of India raised its key rate by 35 basis points to 6.25% in early December. In its three prior meetings, the hike was 50 basis points each time. Bank leadership said more increases could be coming because of inflation — though most of the investors interviewed by Reuters expect there will be just one more hike.

In the US, the federal funds rate now stands at 4.25% to 4.5%. According to projections from Fed board members and bank presidents, the forecast is for a 5.1% rate by the end of 2023, falling to 4.1% in 2024 and 3.1% in 2025.

C2FO’s Atkins thinks the Fed will likely increase rates two more times, at 25 basis points each, then pause, leaving the prime rate around 8%. It may take the US central bank until 2024 or 2025 to cut rates, though, because the Fed has tended to mistime its reactions.

“We continue to anticipate that ongoing increases will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time,” Fed Chairman Jerome Powell said during a news conference.

The ECB, meanwhile, warned that its rates “will still have to rise significantly at a steady pace” to return to the 2% target.

Rate increases have real-world consequences for businesses, especially for small and midsize firms that will have to pay more to borrow capital.

For example, the median rate for new variable-rate lines of credit increased to 5.58% in the second quarter of 2022, up 118 basis points, according to the Kansas City Federal Reserve’s most recent survey of small business lending. That was roughly in line with the increases to the federal funds rate that quarter.

At the same time, the survey found, about 1 in 6 lenders indicated they were shifting to tougher credit standards and loan terms — another obstacle for smaller businesses.

Ultimately, the pressure to raise rates all comes back to inflation, which continues to remain high. In November, Europe was at 10% on a year-over-year basis, down a little from 10.6% in October, while the UK consumer inflation went from 11.1% in October to 10.7% in November.

By contrast, US consumer inflation was 7.1% in November.

When will inflation return to normal?

The good news is that several economic forecasts for 2023 call for lower inflation in the coming year. (Compared to 2022, year-over-year inflation will look better even if there’s only mild improvement in 2023.)

However, inflation might not be “normal” until 2024 or 2025 at the earliest.

C2FO’s Atkins predicts that US inflation will drop to 4% to 5% by the end of 2023. The most important thing is that it’s now seemingly on a “glide path,” a gradual trend toward lower and lower rates of inflation.

After all, there are some signs that interest rates are having the desired effect. Growth and consumer spending have slowed significantly, particularly in the housing sector, which should help cool rising prices.

“I believe by the end of next year you will see much lower inflation, if there’s not an unanticipated shock,” US Treasury Secretary Janet Yellen told “60 Minutes” in December.

The operative words, of course, are “if there’s not an unanticipated shock.”

The current economy is arguably the result of a string of unanticipated shocks, including but not limited to COVID-19, supply chain breakdowns, persistent workforce shortages and a war in Europe.

It’s entirely possible that other shocks could hit, undermining the economic forecast for 2023. For example:

  • When and how will the Ukraine-Russia war end? Are there other potential hot spots that could flare up?

  • How will Europe endure what could be a colder, harsher winter? Will energy reserves be enough to last until spring?

  • Will interest rates slow the global economy beyond what’s necessary to ease inflation, causing longer-lasting disruptions?

How businesses can prepare for the coming year

In a recessionary environment, it’s critical for businesses to secure ready access to working capital, so they can continue to meet their financial obligations and, where possible, continue investing in growth.

That should include actively managing receivables to shorten days outstanding. C2FO’s Early Payment platform helps accelerate by an average of 32 days in most cases, in exchange for a small discount to your customer.

Savvy businesses should already have established relationships with lenders that understand and believe in their companies, but they should also realise that, in a recession, many banks will reduce or even eliminate credit lines.

In those cases, a solution like C2FO’s offers another option for improved cash flow that isn’t tied to traditional lending. By utilising early payment, businesses can quickly access funds they’ve already earned from their customers, removing risk from the equation.

The bottom line about the economic forecast for 2023

Even with an increased threat of recession, there is still hope that inflation and interest rates will ease in 2023, though slower growth could be the price.

C2FO’s on-demand platform has several powerful options for bolstering companies’ cash flow, including early payment, Dynamic Supplier Finance and other easy-to-implement tools. Learn more about how it works here.

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