Moving beyond a binary world - a slow speed of adjustment year in 2023

In the summer, we discussed the world being binary - inflation / no inflation; recession / no recession; geopolitical crisis / no crisis. The world threats were between extremes. See Global macro decision choices - A binary world? Now we are entering a new world that is not about binary choices but about the slow grind of reality versus expectations. Uncertainty is elevated and will stay elevated.

Inflation may have mixed rates around the world, but the focus is now on the grind lower for inflation not whether it will be present. It is being viewed as a speed of adjustment process. 

A recession is expected in 2023 by most market analysts. The focus is on how fast economies will grind lower. The stagnation is not about a strong or deep recession but focused on slow growth with a shallow recession. It is not a question of whether it will occur, but when and how deep.

Geopolitical risks such as war are now focused on the grind from stalemates and gridlock. Geopolitical risks will be with us for the year and not have easy solutions.

The energy shock is now about dealing with lower temperatures and the fact that stocks will be depleted as we move through new year.  Energy shortages will be present even with natural gas and oil prices currently almost unchanged for the year. It is a matter of when and how bad. 

Policy choices were about strong inflation fighting or weak inflation fighting. Now we are about focused on terminal rates and length before loosening and how to smooth the effects of monetary policy.

Getting forecasts right or wrong were a big deal in 2022 because the cost of being wrong was so high. The forecasts of 2023 will be more subtle and take more work at getting right but the costs of being wrong may be less as speed of adjustments slow.