The global economy is decelerating, with many countries at risk of recession in 2023. In the United States, the Federal Reserve's aggressive interest rate hikes to combat inflation threaten to collapse the housing market and increase unemployment. The resulting strong dollar is exporting inflation to emerging markets, complicating their ability to service hard-currency debts. Europe is dealing with a severe energy crisis that is shuttering factories and straining consumers, with the extent of its downturn heavily dependent on winter weather conditions. Meanwhile, China is contending with a housing market crash and the instability caused by its zero-COVID policy, which imposes sudden, stringent lockdowns.
The first half of 2023 might offer some respite. Europe has sufficient gas reserves to survive a mild winter without a major crisis. Although commodity prices will remain high and volatile, avoiding the rapid price increases seen in 2022 could help reduce headline annual inflation somewhat, easing the immediate pressure on the Federal Reserve.