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2023: The Year That Wasn’t

Sachchidanand Shukla Dec 06, 2023

As the year end is nigh, not only is it a good time to review the year that is about to go by but also a ritual really tough to resist. Murphy's Law suggests that things go wrong when they are least expected. The law did come into play repeatedly throughout 2023 but the global as well as the Indian economy and financial markets dodged several bullets through the year. Sample this – Mortgage markets across the West fared well despite elevated interest rates. Two of the three largest banking failures in US history occurred in the first half. US bond markets survived one of the most punishing episodes in recent memory and yet the global economy and financial markets shrugged them all off. Not surprisingly, the resilience caught most forecasters and analysts wrongfooted as many of these anticipated events did not materialise or have the expected results.

Here’s a look at a few mega events that were overwhelmingly forecast to happen and alter the year 2023 but failed rather astonishingly.

The US Recession
This would surely go down as the most-anticipated recession in US history ever that didn’t happen even by a mile! In fact, at the beginning of the year, forecasters surveyed by the Federal Reserve Bank of Philadelphia put the probability of a downturn in the next four quarters at more than 40%, the highest reading since at least 1975. A model created by Bloomberg Economics had assigned 100% risk with a start date of September. Most other private forecasters averred that it wasn’t a question of “if’ but only ‘’when’’ and had ascribed a high probability to the impending recession. Interestingly, over the last 4 quarters, real US GDP grew at a healthy 2.9%, far surpassing the consensus 0.2% growth projected last year. This has been strongly supported by consumption spending as well as a strong labour market.

The Fed Pivot
The year before, the U.S. economy was struggling with high and persistent inflation and Fed was going through one of the most aggressive cycles of rate hikes. It had increased the Fed policy rate by an unprecedented ferocity ie 425bps within 10 months in 2022. Given this backdrop, most economists and financial analysts anticipated 2023 to be the year of a Fed ‘pivot’. Moreover, there were heightened risks of a financial contagion when over the course of five days in March 2023, three small-to-mid sized U.S. banks failed, triggering a sharp decline in global bank stock prices. This was followed by the collapse of Credit Suisse in March 2023 after a series of scandals, which added to the scare of run on other international banks. The situation was salvaged by a swift response by regulators to prevent a global financial crisis. But given its unwavering commitment to bring down inflation within its target of 2%, the Fed continued its rate hike journey, raising rates by 100 bps up to July in 2023 contrary to market expectations.

The DXY Crossroads
With the expectation of the US Fed pivot and forecasts of a US recession, a host of forecasters anticipated a bout of weakness for the USD and strength for several EM currencies esp towards the latter half of 2023. However, the U.S. currency was on a tear, and the Fed’s decision to raise interest rates during the year and reiteration of “higher for longer” kept the USD really firm through the year. The US exceptionalism was on full display despite the unexpected blow from the rating agency Fitch in August. Fitch downgraded US’ long-term ratings from prime investment grade ‘AAA’ to ‘AA+’ citing fiscal deterioration, high and growing government debt burden and ‘erosion of governance’. This was followed by news of an impending government shutdown due in early October, which was temporarily averted hours before a midnight deadline by passing a stop-gap spending bill that kept the government running.

The Oil Price Shock
Throughout the year, high crude oil price remained a matter of concern with production cuts by OPEC+ members. Saudi Arabia and Russia announced voluntary cuts starting in July this year and were extended until end of 2023.To prop up oil markets, the Saudi kingdom has been holding back its production at 9 million b/d, which has been at its lowest level since April 2011. The sudden attack on Israeli civilian and military installations in Oct stunned the world. While Israel itself wasn’t a major oil producer, the geopolitical risk surrounding the Israel-Hamas conflict was the most significant since Russia’s invasion of Ukraine last year. Oil futures leapt and the uncertainty surrounding the conflict’s impact on oil-producing countries got partially priced in over the days after the attack. However, there was fear all around that an escalation with Hezbollah and other regional players could send prices soaring past the $100 mark. However, oil prices have remained contained providing succour to many oil importing nations including India.