I wrote earlier about one reason why the 2023 recession could be deep: the extreme rise in commodity prices (including oil) Here is an updated and slightly amended chart showing the relationship. Because a sharp rise in commodity prices leads to a later fall in economic activity, commodity prices in the chart are plotted with an inverted scale and with a 24-month lag.
The relationship isn't perfect, and the lag isn't consistent from cycle to cycle. Nevertheless, it seems plausible that we will experience a recession as bad as the GFC (2008) or the recession after the first oil shock (1974-75). Note that the covid crash (2020) distorts the relationship in that year, but of course, the crash led to a plunge in commodity prices, shown as a rise in the yellow line through 2021.
The second reason why the recession will be deep is that Central Banks have raised interest rates sharply. Once again, the economy falls, with a lag, when interest rates are raised, and rises, with a lag, when they are cut. So the rise in interest rates over the last few months will only start showing up in economic growth in 2023. Note that, even though Central Banks may have started increasing their discount rates more slowly, they are still raising them. The red line in the chart below (falling because it's been inverted) hasn't stopped its decline. A turn could be 3 to 6 months away. Once again: this implies continuing and worsening recession all through 2023, prolly deeper than the GFC.
Then there's the behaviour of my US longer-leading index, which points to the deepest recession in 35 years. The US is the world's dominant and most influential economy. If it goes into recession, the rest of the world is likely to follow (with the exception of China, discussed below)
And in most countries, fiscal policy is tightening. This is normal in an economic recovery---as the economy recovers, tax revenue recovers even faster. However, the large debts built up over the Covid Crash have left less room for manoeuvre. It will be harder for governments to stimulate activity by cutting taxes during the 2023 recession.
What could mitigate against this possible deep downturn? In a word: China. China has been loosening monetary policy, not tightening, for the last year. This hasn't led to much acceleration in growth because of frequent abrupt and arbitrary lockdowns, but after recent protests, which have obviously unnerved the Chinese authorities, these policies have been relaxed. Yet mass deaths are bad for growth.
The steel price in China has started to rise, as have global iron ore prices. These are classic signals that China is stimulating its construction sector to encourage economic growth, as it has done in every cycle for 40 years. Given the slowdown in China's population growth and the rise in the percentage of pensioners, this method of stimulating the economy might not work so well this cycle. There is a significant oversupply of flats, and ppl burnt once by property company collapses may be happy to buy pre-existing flats in preference to new ones off the plan. Nevertheless, the Chinese economy is out of phase with the rest of the world, and it is big enough to mitigate the global downturn elsewhere.
In my judgement, and it is not new, there will be a deep global recession in 2023, but some countries will move against the tide: China, India (possibly -- it's still holding up) and maybe Australia, because of iron ore exports to China. But plunging house prices in Australia and a reluctance to use fiscal policy to prevent recession suggest that, at best, Australia will avoid a deep recession.
I'll be updating my US and Chinese indices and indicators over the next few days. I'll keep you posted.
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