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MARKET PERSPECTIVE


ECONOMIC FORECAST 2023: 3 ESSENTIAL QUESTIONS FOR BUSINESSES

DECEMBER 28, 2022  |  
THE C2FO TEAM




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 organizations 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 signaled 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. 

 * According to the IMF, global inflation will hit 8.8% in 2022 before dropping
   to 6.5% in 2023 and to 4.1% in 2024.

 * Among OECD countries, average inflation will drop from 9.4% in 2022 to 6.57%
   in 2023.

 * The European Central Bank predicts that inflation will drop off “sharply” to
   3.6% by the end of the coming year and could be back to the 2% target by
   2025. 

 * In the US, the most recent Fed projections predict that total personal
   consumption expenditures (PCE) inflation will be 5.6% for 2022 and fall to
   3.1% in 2023, 2.5% in 2024 and 2.1% in 2025.

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 realize 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 utilizing 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.




WANT TO TAKE CONTROL OF YOUR CASH FLOW?

EARLY PAYMENT THROUGH C2FO CAN HELP.

LEARN MORE


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866.463.6565

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