Inflation will reach its peak in 2023, and growth will slow.

With too much consumer demand after COVID, too much inventory in stores, and the fight against inflation continuing to slow growth in 2023, Morgan Stanley thinks that global GDP growth will peak at just 2.2%, just enough to avoid a recession but less than the 3% growth expected for 2022.

The world's inflation will peak in the fourth quarter of 2022, which is good news. In fact, slowing demand, price discounts due to high inventories, and falling housing prices, among other things, will help keep inflation in check. This, in turn, should make the major central banks stop and think about their recent historic string of rate hikes.

Other important things to know about the world economy in 2023 are that the

-U.S. economy will grow by 0.5% and stay in the same place.

-Europe and the UK are likely to see their economies shrink.

-The economies of emerging markets should slowly get better.

Inflation and central-bank action will impact 2023 economic development.

The last 12 months have seen the fastest Federal funds rate increase since 1981 and the fastest ECB rate increase since the Eurozone's inception, says Morgan Stanley's Chief Global Economist Seth B. Carpenter. As consumer goods supply chains recover and labor markets smooth out, inflation could fall sharply and broadly, easing policy and boosting global economy.

Our 2023 view is nuanced, with few huge shocks. Regional differences can be considerable. Asia could offer green shoots for development, especially in India, and emerging market economies could profit when the Fed finds its peak rate and the dollar eases.

U.S.: Soft Landing, Weak Recovery

All eyes are on U.S. consumer prices, which are growing 8.2% YoY but on track to rise just 2.4% by 2023.

Slowing GDP and inflation may cause the Fed to stop raising rates. Ellen Zentner, chief U.S. economist, expects the goal range to peak at 4.5% to 4.7% in January 2023, then drop steadily through 2024. In this scenario, the U.S. economy should have a soft landing and moderate comeback, instead of a hard landing and rapid recovery.

Zentner adds that despite the Fed lowering its balance sheet by not replacing maturing government bonds, “we do not expect active sales.” Since the housing market has already declined, selling mortgage-backed securities risks being excessive.

While corporations have delayed hiring, lean payrolls and problems filling qualified positions argue against massive layoffs in 2023. Net job increases have slowed, and a moderate boost in labor force participation would likely result in a somewhat higher (but healthy) unemployment rate of 4.3% in late 2023.