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World economy in 2022–2023
Aggressive monetary tightening, unmanageable prices, and a massive purchasing power decline are key “pains” of the US, UK, EU, and the rest of the developed world.
Fig. 1. Inflation growth, %, January 2004 – May 2022: USA, EU, Canada, UK, Japan. Source: Bloomberg, Wells Fargo.
And here are the interest rates rising from 2013 to 2022. Here’s also projected growth through the whole of 2024.
Fig. 2. Interest rates dynamics plus forecast. Banks: US Federal Reserve, ECB, Bank of England, Central Bank of Japan, Central Bank of Canada.
In 2023, the recession risk will increase substantially for the major economies. Real GDP growth is out of the question against the backdrop of hard-to-manage inflation and higher bank rates. Wells Fargo economists say that the likelihood of a recession is high both for the countries of the European Union, England and the United States, and all their trading partners.
Dollar and other currencies in 2023
Dollar and others until late 2022
Wells Fargo: “The dollar will be strong until early 2023. At the end of 2023, the Greenback start weakening against most foreign currencies.”
The exception is Latin America’s currencies, which will be under pressure due to high political risks, as well as a tight and uncoordinated monetary policy within the region. The Chilean Peso, the Brazilian Real, and the Peruvian New Sol will be the worst off.
The key argument in favor of the dollar strengthening until the end of 2022 is that the markets are still underestimating the possibilities of the US Federal Reserve, not believing that the Fed will generally be tighter on monetary management than the Bank of England or the ECB.
Wells Fargo predicts that the dollar might look strong against the pound and the euro through 2023. The yen might weaken even more against the dollar.
At the same time, the Canadian dollar shouldn’t weaken against the US dollar if the Bank of Canada joins the Fed’s hawkish monetary policy after some time.
Dollar in 2023 and further
In the longer term, there are far fewer arguments in favor of a strong dollar. Economists argue that the Fed will be the only G10 central bank to return to monetary easing instead of tightening for the foreseeable future.
The Fed is expected to start cutting rates around mid-2023. From now on, the dollar will begin to weaken if other economies do not join the Fed’s policy of easing monetary policy. And here, a scenario is possible in which the investment attractiveness of the US economy and the dollar fall.
The attractiveness of other currencies from the G10 will increase – they can noticeably strengthen against the greenback. At the same time, a powerful rally for the G10 currencies is unlikely.
Strong growth is unlikely for the currencies of developing countries either. This also applies to the Chinese currency.
In summary. The global forces’ alignment will be different
If you look at the current GDP and forecasts by region, you get the future world image. Global forces and global influence will gradually flow from one player to another.
Fig. 3. GDP growth by country 2020–2022 and projections for 2023. Source: IMF, Wells Fargo.
The future economic growth of the US and EU countries does not look good. For England, in general, the economy is projected to shrink by 0.1%.
India has the largest GDP growth (5.1%). China has 4.2%.
It is obvious that the role of the rupee and the yuan will become more prominent, primarily in international trade. At the same time, the share of the dollar will decrease in cross-border settlements. This process is underway.
The share of the dollar in world foreign exchange reserves will also decline. And this process has already started too.
First, countries seek to diversify their investments by increasing the share of currencies from countries with higher potential for growth.
Secondly, the situation with the freezing of the gold and foreign exchange reserves of the Central Bank of the Russian Federation in 2022 led many to think that it is safer to keep their savings in the currencies of countries with which friendly relations have been established.
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