William De Vijlder


Economists rarely use the word “certainty” when talking about the future but at present I would like to make an exception to this rule. We are pretty convinced about three major developments that we expect for 2023.

The first one is disinflation: inflation should go down during the course of this year. For a number of reasons: the slowdown in economic activity, the easing of supply chain bottlenecks, but also importantly, the fact that the year over year comparison of energy price changes will become a favourable factor and will push down inflation.

The second key trend will be that the policy-tightening cycle that was started by central banks in the course of 2022 should come to an end, we should reach the peak level of the official interest rates. This does not mean that the rates will be cut subsequently, but that they have reached a peak level and that already imply a change in sentiment in financial markets.

The third factor is that part of the year will be spent in recession. Recession has probably started in the euro area but later this year we will also have a recession in the United States and that will be the consequence of the aggressive monetary tightening in conjunction with elevated inflation. Aggressive monetary tightening makes credit more expensive and weighs on demand, elevated inflation is weighing on purchasing power and is also weakening demand.

These certainties are surrounded by a range of uncertainties, various factors of known-unknown.

The first one on the list is the extent and the speed of disinflation. There is a concern that the decline in inflation will be slower than expected. One reason is that the number of companies complaining about rising input prices has certainly gone down but still remains quite high and that will have an impact on their sales prices. Another reason is that wage growth is expected to accelerate further in the euro area. It remains high in the USA and that should as well have an impact on inflation via the influence on the pricing policy of companies.

The second source of uncertainty is the peak level of official interest rates. Should it turn out that interest rates will be hiked more than what is currently priced by financial markets, it will have a bearing on the financing conditions in the economy and  on the cost of borrowing via capital markets conditions and will also have an influence on mortgage rates, etc. All these elements brought together will have an impact on how demand will evolve in the economy.

And that brings me to a third source or uncertainty which is the exact nature of the recession. We expect the recession to be rather short-lived and not very deep  but it could turn out to be deeper. One reason why it could be deeper is the uncertainty about the energy prices. Energy prices have been going down in recent weeks but there could be another spike (gas prices). And finally, an element of uncertainty which is more related to 2024 but which will have an influence on decisions taken in the course of this year is the exact nature of the recovery. The expectations of companies and households about the recovery for next year will already influence the decisions which will be taken in the course of this year. So three certainties buy many uncertainties.

When thinking about the outlook for 2023, it is important to pay enough attention to several factors of resilience. You could call them support factors.

The first element of resilience is labour hoarding. Companies in the US and the euro area have been struggling to recruit people and that will have an influence on the way they manage their headcount during an economic downturn. Companies will be reluctant to let people go if they consider that during the recovery they will again be confronted with major problems in finding staff. So holding on to the headcount is going to be a factor of resilience during an economic downturn.

The second element of resilience is the energy transition requiring huge investments and that will also be a support factor for the economic activity and demand. Another support factor is coming from governments. Governments in many countries have taken measures to cushion the impact of elevated inflation for households and companies. That is going to be an element of resilience.

The excess savings accumulated during the pandemic will also play a role.  Admittedly, they have been partly eroded by high  inflation but still they have not disappeared completely. So that will mean that if necessary households will be able to tap into these excess savings to support their spending.

The final element of resilience is that the balance sheet quality of households and companies in the euro area is of significantly better shape than has been the case for many years.

So several factors of resilience that should be kept in mind when striking the balance between the elements of certainties and the elements of uncertainties.