2022–2023 Outlook: Volatile Bull

Genevieve Signoret

(Hay una versión en español de este artículo aquí.)

We have built three forecast scenarios for the global economy and markets in the next eight quarters. What follows is the executive summary. For the full 21-page forecast report in PDF, click here or visit our Research page. 

Executive summary

We cannot see ahead but rather squint to peer through a thick veil of uncertainty. We identify eight key sources of uncertainty, and then, based on our assumptions as to those unknowns, build three possible forward  tracks, or scenarios, for the global economy and markets in 2022 and 2023.

We call our central scenario Volatile Bull, because, in it, although the economic recovery begun in May 2020 and the bull market begun in March of that same year both restart, volatility turns out considerably higher this year than last. Happily, post-Omicron variants of the coronavirus, are no more deadly than Omicron. China relaxes its zero-tolerance policy regarding Covid to learn to live and work with Covid; this helps to ease global supply chain bottlenecks. But, while these bottlenecks do peak no later than June of this year, they resolve themselves only slowly. Also, although Russia refrains from invading Ukraine, tensions between the West and Russia and Iran both remain high, and the resulting uncertainty keeps upward pressure on world energy prices strong.

Meanwhile, in Mexico, while AMLO is weakened by a low voter turnout in the 10 April 2022 recall referendum, he manages to tweak his anti-growth, anti-clean-energy electricity reform enough to attract the PRI votes needed for it to pass.

Brent crude oil under Volatile Bull assumptions averages $110 this year and a still-high $80 next year. The Fed takes the federal funds target rate to 2.00% in 2022 and leaves it there in 2023 while gradually shrinking its balance sheet. Market participants, however, by the end of March of this year stop the tantrum they threw starting in January and start to see these measures as sound and unthreatening; the bull market resumes. Core PCE Inflation ends 2022 at 3.0%, then ticks down to 2.5% in 2023. The yield on a U.S. 10-year Treasury bond, after peaking this year at 4%, settles down next year at around 2.5%.

Under central-scenario assumptions, in Mexico over the next two years, the dollar averages MXN 22.50 this year and 21.00 in 2023. Policy rates reach 6.5% in 2022 and stay there, while inflation slows down this year to 4.0%, next year to 3.5%. GDP expands by an anemic 2.0% in 2022 but picks up to 3.5% in 2023.

We have also built two alternative (“risk”) scenarios. In one, things turn out worse than expected; in the other, much better than expected.

Whereas we strive for realism in our central scenario, we shed that goal in our risk scenarios. Our goal with these scenarios is to sharpen client and reader awareness of the risks and opportunities that lie ahead, and the resulting wide range of possible outcomes surrounding our central-scenario numbers. Our hope is that this will inspire them to hedge for downside risks while positioning themselves to seize with agility opportunities that may arise.

We dub our downside risk scenario Recession for an obvious reason—the world economy goes into a severe recession in 2023. We name named our optimistic upside risk scenario Raging Bull because, in it, markets very quickly accept the inevitability of Fed tightening and see it as the sound and still quite loose policy that it is; the bull market already in February not only resumes quickly but also rages on over the forecast period with no greater volatility than observed in 2021.

We hold our central scenario with high conviction, assigning to it a high 85% subjective probability. We view the odds that the world economy will fall into a recession and markets will perform worse than expected under central-scenario assumptions and as around 10%, and that life will turn out more pleasant than in our central scenario as 5%.

As these unbalanced odds imply, we judge the risks to our central-scenario forecast to be tilted to the downside.

Click here for the full 21-page forecast report in PDF.