The outlook for economic growth in 2023 is gloomy. Real wages shrink because of high inflation. This will weaken demand in the medium term. At the same time, households and businesses are facing higher financing conditions. In Europe, the uncertainty surrounding the war in Ukraine and the energy crisis are further weighing on the outlook.

Leading economic indicators, such as the global purchasing managers' index, which stood at 48.2 points in December, confirm the trend towards weakening growth momentum. As a result, analysts predict an 80 per cent probability that the euro area will enter a recession in the next 12 months.

Inflation

We expect inflation to decline over the course of the year. However, this is likely to be only gradual, so that even at the end of 2023 inflation will still be above the central banks' targets in many places. The following three arguments justify this expectation: 

• Energy and food prices are expected to decline due to the economic slowdown. It should be noted here that inflation would fall even if prices stabilised, as inflation is a growth figure.
• The material and supply bottlenecks have improved but is not yet completely resolved. In the short term, China's departure from the zero-covid policy and the resulting increase in new infections are again limiting local production capacity.
• Currently historically low unemployment rates in Europe and the US should prevent core inflation from collapsing rapidly.  

Forecast uncertainty regarding inflation trends is high. For example, a geopolitical escalation could still push commodity prices and thus inflation up again.

As a result, significantly lower growth rates and still higher inflation are to be expected. Due to geopolitical and energy policy risks, stagflation is likely to be most noticeable in the euro area.

In 2022, monetary tightening occurred globally in the face of historically high inflation. In the last quarter of 2022, 38 out of 65 central banks raised their key interest rates at least once. There has not been such a regionally broad-based cycle of interest rate hikes since 2007.

The Fed raised its policy rate by 425 basis points (bps) last year. The last time interest rates were raised this much and this fast was at the beginning of the 1980s. We expect the Fed to tighten monetary policy further until a policy rate of 5.00-5.25% is reached. The US labour market is showing signs of a gradual slowdown. The trend of additional new jobs created is declining, but still positive, and this is crucial in our eyes. Accordingly, we do not see a significant increase in the US unemployment rate in the coming months and a rapid decline in the inflation rate thus appears unrealistic.

At the same time, the Fed's balance sheet is to be further wound down. In 2022 it was already reduced by more than USD 400 billion. In relation to US GDP, however, the balance sheet is still significantly higher at 34 percent than before the pandemic (18 percent). In 2023, the balance sheet is expected to shrink by up to USD 95 bn per month.

From March 2023, the European Central Bank (ECB) also intends to gradually reduce its securities holdings. The redemption amounts of securities at maturity are no longer to be fully reinvested, so that by the end of the second quarter of 2023 the holdings will be reduced by an average of EUR 15 billion per month.

Interest rates, however, remain the ECB’s key policy instrument. ECB chief Christine Lagarde said that to get inflation under control, the central bank "will continue to raise interest rates significantly" over the next few months. Accordingly, steady interest rate hikes can be expected in the euro area in the first half of the year.

In Switzerland, we expect the Swiss National Bank (SNB) to raise key interest rates in March 2023. As inflation in Switzerland is subdued by international standards, interest rates in Switzerland are likely to rise less sharply than in neighbouring countries. The SNB is also prepared to sell foreign currency if necessary.

Review: At the end of 2022, interest rates once again rose significantly. The yield curve of German Bunds experienced a parallel shift of almost +60 basis points (bps) in the maturity range of 2 to 10 years. At the long end, interest rates rose only slightly more, which is why the yield curve remained flat.

The background to the rise in interest rates was not so much the ECB's key interest rate hike of a further 0.50 percentage points, which had already been expected by the market, but rather the announcement by ECB President Christine Lagarde that the end of interest rate hikes was not yet in sight.

The US Treasury yield curve remained strongly inverted at the end of the year. In 2022, interest rates at the short end shot up by more than 4 percentage points, while interest rates at the long end of the curve increased by just over 2 percentage points.  

Corporate bonds saw a bear market rally in the fourth quarter. Credit spreads on investment-grade Euro corporate bonds, as measured by the Bloomberg Pan European Aggregate Corporate Index, tightened by 55 bps from the beginning of October to the end of December. USD corporate bonds of the same credit quality tightened by as much as 29 bps (Bloomberg US Aggregate Corporate Index).

Review: The fourth quarter, like the previous quarters, was characterised by heightened volatility. Increasing investor optimism caused the MSCI World to rise by over 15 % from the beginning of October to the end of November. In December, uncertainty again spread among investors when the central banks made it clear that the fight against inflation was not yet over. Global stocks subsequently fell again by over 4 %.

At the end of the year, the annual performance of the EuroStoxx 50 was -12% and that of the SMI -17%. The S&P 500 and the MSCI Emerging Markets Index, where a stronger recovery was seen after the pandemic than in Europe, lost 20% and 23% respectively last year.

Review: Foreign exchange movements in advanced economies were primarily determined by the varying pace of interest rate hikes by the central banks.

Thus, the strength of the US dollar dominated foreign exchange markets last year. Only towards the end of the year lost the greenback some of its value, but overall it gained more than 8% against the currencies of the most important US trading partners last year.

Among advanced economies, the Japanese yen is one of the biggest losers of the year. Unlike Western central banks, the Japanese central bank did not raise key interest rates in 2022. The Japanese Ministry of Finance even had to intervene several times to stem the slide. The sudden decision by the Bank of Japan to allow slightly higher interest rates on long-term bonds surprised investors and subsequently strengthened the yen. At the end of the year, the JPY was at 131.12 per US dollar, which still corresponds to a depreciation of 14 percent.

The euro also showed weakness last year, due to the initially rather hesitant ECB and the uncertainty surrounding energy supplies. After bottoming out in September, the euro appreciated by 9 per cent against the US dollar and by 2.3 per cent against the Swiss franc in the fourth quarter. At the end of the year, the euro was still below parity with the franc (CHF 0.98956).

Review: On 15 December 2022, the Swiss National Bank made its third interest rate step in 2022, raising the key interest rates by +50 basis points to 1%. In 2022, there were thus cumulative interest rate steps of +175 basis points (from -0.75% to 1.0%). The latest interest rate decision had already been largely priced in by the financial markets before the decision. This can be seen from the fact that the SXI Real Estate Funds Broad Total Return Index, among others, hardly reacted significantly after the interest rate decision on 15 December 2022. The index closed the year 2022 at 440.13 points and thus with an annual performance of -15.2 %.

The interest rate trend is also increasingly noticeable in the direct real estate market. According to Fahrländer Partner (survey of eight valuation companies), the minimum discount rates for multi-family houses have been rising slowly but steadily since mid-year.

However, there are also positive signals in the Swiss real estate market, especially with regard to the demand for rental flats. On the one hand, immigration has gained significant momentum in 2022. The migration balance of the permanent resident population increased by 32.9% or around 19,000 persons between January and November 2022 compared to the previous year, according to data from the State Secretariat for Migration SEM. Compared to Europe, Switzerland has thus recently become more attractive as a place to live and work.

Since 2012, the demand for space per inhabitant in Switzerland has increased by 1.6 m2 to 46.6 m2 according to the Federal Statistical Office, which corresponds to an increase of 3.6 %. In the last three years (2019 to 2021), the average living space has even increased by more than 0.5 % per year, which has a positive effect on the demand for housing.

Interest in homeownership has declined significantly since mid-2022, according to data from Realmatch360, and is back to roughly the same level as before the COVID 19 pandemic. The declining interest in homeownership is likely a result of rising interest rates. In addition, rising borrowing costs mean that the purchase of residential property for rental ("buy-to-let") has become much less attractive and is continuing to lose ground. Despite the reduced interest in home ownership, however, no negative price shifts have yet been observed. However, living in rented flats is becoming more attractive again compared to home ownership, which should have a positive effect on the demand for rented flats.

Demand for office space has also developed positively recently, because of strong employment growth as well as catch-up effects after the COVID 19 pandemic.