Expect a global recession, continuing asset price declines, and waves of defaults, writes columnist Christopher Joye.
Unfortunately, the next 12 months are likely to be very difficult for business, households and investors. Many jobs will be lost and scores of firms will not survive a world in which money has suddenly becomeOne cannot help but think many valuations will need to revert to the levels observed decades ago when interest rates were much higher.
The existential question for 2023 is whether we get true mean-reversion in core inflation rates via demand destruction and supply chain normalisation that allows central banks to in turn relax their monetary policy constraints. These will only continue to tighten in the first half of the year, like a python asphyxiating its prey.
The biggest inflation shock in 40 years has forced the RBA’s cash rate back up to 3.1 per cent, which is the first time Australia’s risk-free benchmark has had a 3-handle since 2012. Most analysts project that the RBA will continue to tighten its screws until the cash rate sits between 3.5 and 4 per cent in 2023, which is 100 basis points above Martin Place’s estimate of its minimum “neutral” level of about 2.5 per cent.P 500 is similarly still 13.5 per cent above its pre-pandemic peak .
What is all but certain is that we will see continuing asset price depreciation, particularly in residential real estate, commercial property, private equity, venture capital, infrastructure, and high-yield bond and private loan markets. A striking retrenchment in corporate earnings growth should also continue to threaten listed equity valuations.
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