Macroeconomic & Geopolitical

Why It’s About to Get Even More Complicated From Here

December 2022 – 3 min read

This year’s choices were hardly simple, but economic policymakers in China, Europe and the United States face much trickier decisions in 2023.

If making economic policy seems complicated this year, it’s about to get much harder.

The good news is that the extreme outcomes investors worried about through most of 2022 look less likely for 2023. Central bank tightening seems to be working. As supply chains normalize and demand cools, inflation is heading lower.

Conversely, the dire predictions of a global economic collapse have yet to play out. If anything, the odds of a serious recession seem to be moderating given the recent strength of labor markets, corporate profits and bank balance sheets.

But there’s still plenty of uncertainty about an outlook that is neither boom nor bust. Three complicated sets of policy decisions loom in the coming months.

In China, the pace of relaxing COVID restrictions will determine just how strong a recovery to expect in the world’s second largest economy. In many ways, imposing strict lockdowns looks like an easy choice compared to the much more uncertain process ahead. Local officials will have to decide which restrictions they can remove to restore more normal levels of activity even as they assess the risks of rising infections overwhelming the healthcare system.

With a property market only now stabilized, consumer confidence may be slow to bounce back. But even a halting rebound counts as a recovery.  Indeed, as long as officials calibrate a post-pandemic strategy more or less successfully, China will be the only major economy where growth will actually accelerate next year even if it falls short of current 5% forecasts.

Europe’s most important decisions center around its energy needs as it ends oil and gas purchases from Russia. Again, this year’s scramble to secure alternative sources of supply was hardly simple and may still fall short if the weather turns much colder. But the task ahead is to secure next winter’s supply at a reasonable price, while minimizing the shock to a much weaker economy.

Global prices remain beyond the control of European finance officials, but they will be hunting for new liquefied natural gas supplies just as China’s demand for energy recovers, too. They will also need to decide how best to cushion the pain from higher energy prices with extended subsidy schemes.

The outlook is not nearly as dire as it was just a few months ago when there was talk of energy rationing and rolling blackouts. But the European Central Bank will face difficult choices as it tries to weigh inflation risks that hinge largely on highly volatile energy prices.

In the United States, all eyes will remain on the Federal Reserve as it navigates what even Chair Jerome Powell admits is a narrow path to a soft landing. Abandoning “Team Transitory” and hiking rates sharply this year now looks obvious with consumer price inflation that peaked in June at 9.15%. The difficult judgements ahead will rest on cooling a hot jobs market without inflicting too much damage on the rest of the economy.

Recent data show that labor demand has started to ease as both job openings and quit rates fall. But historically low unemployment levels and rising hourly earnings remain worries and may force tighter policy for longer.

On the other hand, existing home sales are falling fast after the recent spike in mortgage rates. Prices remain far above pre-COVID levels and need to settle in more affordable ranges, but there are worries that a rapid deterioration could undermine consumer demand and make the recession much more serious.  

High prices and interest rates globally should continue to cool demand and bring inflationary pressures back under control. But just how long and messy that becomes will depend largely on COVID choices in China, energy decisions in Europe and interest rate balance in the United States. For now, a European recession looks likely, while the U.S. downturn should be mild and relatively brief.

Markets may deliver more volatility under these circumstances rather than a large move in either direction. These delicate choices will likely deliver mixed signals to markets amid a continuing stream of conflicting and contradictory data. Difficult decisions for policymakers mean difficult decisions for investors, too. 


Christopher Smart, PhD, CFA

Chief Global Strategist & Head of the Barings Investment Institute

Any forecasts in this material are based upon Barings opinion of the market at the date of preparation and are subject to change without notice, dependent upon many factors. Any prediction, projection or forecast is not necessarily indicative of the future or likely performance. Investment involves risk. The value of any investments and any income generated may go down as well as up and is not guaranteed by Barings or any other person. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.

Any investment results, portfolio compositions and or examples set forth in this material are provided for illustrative purposes only and are not indicative of any future investment results, future portfolio composition or investments. The composition, size of, and risks associated with an investment may differ substantially from any examples set forth in this material No representation is made that an investment will be profitable or will not incur losses. Where appropriate, changes in the currency exchange rates may affect the value of investments. Prospective investors should read the offering documents, if applicable, for the details and specific risk factors of any Fund/Strategy discussed in this material.

Barings is the brand name for the worldwide asset management and associated businesses of Barings LLC and its global affiliates. Barings Securities LLC, Barings (U.K.) Limited, Barings Global Advisers Limited, Barings Australia Pty Ltd, Barings Japan Limited, Baring Asset Management Limited, Baring International Investment Limited, Baring Fund Managers Limited, Baring International Fund Managers (Ireland) Limited, Baring Asset Management (Asia) Limited, Baring SICE (Taiwan) Limited, Baring Asset Management Switzerland Sarl, and Baring Asset Management Korea Limited each are affiliated financial service companies owned by Barings LLC (each, individually, an “Affiliate”).

NO OFFER: The material is for informational purposes only and is not an offer or solicitation for the purchase or sale of any financial instrument or service in any jurisdiction. The material herein was prepared without any consideration of the investment objectives, financial situation or particular needs of anyone who may receive it. This material is not, and must not be treated as, investment advice, an investment recommendation, investment research, or a recommendation about the suitability or appropriateness of any security, commodity, investment, or particular investment strategy, and must not be construed as a projection or prediction.

Unless otherwise mentioned, the views contained in this material are those of Barings. These views are made in good faith in relation to the facts known at the time of preparation and are subject to change without notice. Individual portfolio management teams may hold different views than the views expressed herein and may make different investment decisions for different clients. Parts of this material may be based on information received from sources we believe to be reliable. Although every effort is taken to ensure that the information contained in this material is accurate, Barings makes no representation or warranty, express or implied, regarding the accuracy, completeness or adequacy of the information.

Any service, security, investment or product outlined in this material may not be suitable for a prospective investor or available in their jurisdiction. Copyright in this material is owned by Barings. Information in this material may be used for your own personal use, but may not be altered, reproduced or distributed without Barings’ consent.