What are the chances of recession in 2023

Many analysts, economists and even CEOs have warned that a recession is coming next year, but how bad it will be is an open question.

Have things changed

Less than a month ago, The Economist warned that a "global recession is inevitable in 2023", and joined a chorus of prominent people expecting a recession next year. Most dramatic was perhaps Jamie Dimon, the CEO of JPMorgan, who repeatedly said an economic "hurricane" was coming. He stacked up billions of the bank's liquidity in provisions. So, do so many people expecting a recession and staying out of the market imply there will be one? Or do expectations that the market will fall cause the market to fall?

That might be one factor, but there are also reasons to be slightly more optimistic, particularly in light of the most recent inflation data and despite the Fed's 50hps hike. US CPI has come in below expectations twice in a row now, giving investors hope that the Fed won't have to raise rates so much to get prices back in line. Of course, Treasury Secretary Yellen was even more optimistic, suggesting inflation would be under control by the end of the year.

A lot of water has to go under the bridge first

Of course, by the end of the year skips over the first half of the year when a recession is expected. In fact, falling inflation as a reason to be optimistic could also be a sign that a recession is building. After all, inflation falls during a recession. More importantly, a peek into the components of inflation saw the shelter item falling quickly as Fed rate hikes depress the housing market.

Predicting the future is always a tricky business. What is relatively more certain is people pointing to the Fed in almost preemptively blaming it for a recession happening or if it's worse than expected. Even after the better-than-expected CPI figures. The fact remains that there are still a lot of uncertainties, such as the war in Ukraine, tensions over Taiwan, the uncertainty about Chinese reopening, European central banks still fighting high inflation, and high energy costs. Those could provide reasons to worry that the economy will slip into negative. The US already had two quarters of negative GDP growth at the start of the year. Britain acknowledges it's already in a recession. It might be more accurate to say the Fed is just one more thing threatening the economy, not the main factor for an impending recession.

DJIA in broadening wedge

The Wall Street index has put in two troughs and three peaks, with the final peak at 34930 (R2) completing a potential broadening wedge pattern. Losing the most recent trough at 33400 (S1) might offer support at the former trough near 33100 (S2), with a slide lower paving the way to 31700 (R3). A bounce at the lower trendline might offer some respite towards the second peak at 34660 (R1), with chances at 35800 (R3) increasing after a break past the top. This is where the length of the first pullback is projected to reach when added on 34930.

Key takeaways

Many expect a recession in 2023, but recent inflation data may have caused some optimism, potentially leading the Fed to raise rates less than initially expected. However, falling inflation could also signify that a recession is building, as it typically falls during a recession. Several other uncertainties could lead to negative economic growth, such as the war in Ukraine, tensions over Taiwan, and high energy costs.