Since the beginning of the year, prominent analysts have become more confident that the Fed and other central banks can ensure a soft landing for the global economy or even avoid a cyclical slowdown altogether. In light of this, inflationary pressures will soon dissipate, allowing policymakers to stop raising interest rates and then start cutting them later in 2023 or early 2024. High employment and rising nominal wages will support household and business spending over the medium term as the global economy recovers from its recent smooth run. The much larger service sector will deliver sustained growth, while the smaller and more energy-intensive manufacturing sector will be subject to cyclical adjustment to eliminate excess inventory. While this optimistic scenario is plausible, it remains less likely than the economy entering a significant and prolonged cyclical slowdown or full recession in 2023. Global industrial production in December 2022 was no higher than twelve months earlier in December 2021 as commodity spending fell under pressure from high inflation and excess inventory.

The slowdown in production is in line with the start of previous recessions in 2001, 2008 and 2020, and the mid-cycle slowdown in 2013 and 2015, after which the economy picked up again. The slowdown in global trade and freight traffic was more severe as manufacturers and those with distribution networks struggled to reduce excess stock following over-ordering from supply chain disruptions in 2020 and 2021. The volume of world trade fell by almost 3% in 2020 and 2021. December 2022 compared to 2021, according to the Dutch Office for Economic Policy Analysis. This sharp drop in trade was only associated with the onset of a recession, not a mid-cycle slowdown, and is indicative of the severity of the cyclical commodity downturn in the economy. Finally, in the past, the Federal Reserve and other major central banks have typically responded by temporarily suspending interest rate hikes or even cutting them. Today, the bank is expected to continue raising interest rates over the next six months by 75 bp, in addition to 450 bp. previous movements in the last 12 months.