The 2023 Global Economy: Are You Prepared for the Big Changes Ahead?

$Blackrock(BLK.US)$ and $Goldman Sachs(GS.US)$ Goldman Sachs are two of the biggest names in finance, and their recent comments on the state of the global economy are worth paying attention to.
Let's dive in in their 2023 plans.
In 2023, global growth is expected to remain weak, according to Goldman Sachs. The US economy is predicted to narrowly avoid a recession, with core PCE inflation slowing from its current level of 5% to 3% by the end of the year. Meanwhile, Blackrock predicts that interest rates will stop rising and economic activity will stabilize in 2023.
This new economic cycle is being driven by constraints on production. The shift in consumer spending from services to goods during the pandemic caused shortages and bottlenecks. Population aging also led to a labor shortage. As a result, developed countries are unable to produce as much as they used to without increasing inflation. Despite the fact that economic activity is below its pre-Covid levels, inflation is still very high.
Central bank policy rates are not the tool to resolve production constraints; they can only influence demand in their economies. This leaves them with a difficult trade-off. They can either get inflation back to 2% targets by reducing demand to what the economy can comfortably produce now, or they can live with more inflation.
Right now, the Federal Reserve is focused on avoiding a recession. Although there are already signs of an economic downturn, Blackrock expects the Fed to stop raising interest rates once the damage becomes clear. As spending returns to normal, some production constraints may ease. However, three long-term trends are predicted to continue to limit production capacity and solidify the new economic system. These are aging populations causing workforce shortages, ongoing geopolitical tensions disrupting supply chains and globalization, and the transition to net-zero carbon
Venturing into Unknown Economic Territory
Blackrock and Goldman Sachs are convinced that the current economic cycle will be distinct from previous ones. This new economic cycle is ongoing and cannot be halted.
One key characteristic of this new economic cycle is that we are living in a supply-driven world with tough trade-offs. Repeated inflation surprises have sent bond yields soaring, crushing equities and fixed income. This volatility stands in sharp contrast to the last 40 years of steady growth and inflation.
In this new economic cycle, central banks are not expected to come to the rescue when growth slows. Instead, they are deliberately causing recessions by implementing overly tight monetary policies in an effort to control inflation.
According to Goldman Sachs, this economic cycle is unique because the recent normalization of supply chains and the rental housing market is causing disinflation, which was not seen in previous high-inflation episodes such as the 1970s. This is just starting to be reflected in official numbers. The shift in consumer spending from goods to services, the improvement of supply chains, and the increase in inventory levels are all putting downward pressure on core goods prices. Asking rents for new leases have also decreased after the spike in demand for space caused by the work-from-home trend. This suggests that the official measure of shelter inflation has likely peaked and will slow in the future.
New Economic Cycle Requires New Investment Strategies
According to Blackrock, the key factor in their investment strategy is the amount of economic damage that has been accounted for in market prices. As such, their first investment theme for 2023 is damage pricing. They believe that current equity valuations do not fully reflect the potential damage and will become more positive on equities when they think the damage has been priced in or when their view of market risk changes. However, Blackrock does not expect this to mark the beginning of another long bull market in stocks and bonds like the one we had in the last decade.
To succeed in the new economic cycle, investors will need to update their investment strategy. This will involve making more frequent changes to their portfolios by carefully considering their risk appetite and their estimates of how markets are accounting for economic damage. It will also involve taking a more detailed, granular approach to investment, focusing on specific sectors, regions, and sub-asset classes rather than broad exposures.
In the short term, Blackrock believes that treasury bonds and U.S. agency mortgage-backed securities (MBS) offer good opportunities. They will keep a lot of inflation-linked bonds because they expect inflation to last longer than market prices suggest. In the long term, Blackrock will remain underweight as long as long-term government bonds continue to face challenges. In terms of stocks, Blackrock believes that the potential recession is not fully reflected in corporate profits estimates or values, and does not agree with market expectations that central banks will eventually become supportive by cutting interest rates.
To add more detail while staying underweight overall, Blackrock is focusing on sectoral opportunities resulting from structural changes, such as healthcare for aging populations. They also like cyclical in the energy and banking sectors. Earnings in the energy sector are stable even as they decline from historically high levels due to limited energy supply. Higher interest rates are good for bank profits.
While reading outlooks for 2023 from investment funds can sometimes be confusing and contradictory, we must agree that the market is not the same as it once was. New economic cycles are emerging, and the aging populations in Europe and the United States are contributing to higher inflation due to a lack of sufficient workforce. It is clear that a new investment strategy is needed to navigate this changing landscape.
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