2023 Economic Outlook – At the Cliff’s Edge.

Economic Growth Weakens as Oil Production Woes Persist

The global economy was consolidating its recovery from the coronavirus pandemic that occurred in 2020 before it was faced with a fresh problem – the Russia – Ukraine war. The steady improvement was cast into significant doubt again as severe supply chain disruptions and inflationary pressures dominated the global economy. Both the advanced and emerging markets economies experienced historically high inflation levels which prompted a response by policymakers. In the United States, the Federal Reserve normalised policy rates. Therefore, the US Dollar strengthened, and the emerging market economies faced an additional downside – increased capital outflows leading to subdued economic growth.

The trend in the domestic economy was no different, as higher global commodity prices negatively impacted food supply and inflation rose to relatively high levels. The subsequent erosion of purchasing power resulted in subdued output growth as aggregate demand weakened. Meanwhile, financial system stability was threatened by high inflationary pressures and by implication, the foreign exchange market became volatile in 2022. In response, the monetary policy authorities raised rates to improve the negative real return in the economy.

In 2023, we expect global inflationary pressures to persist, but we see a moderation as the initial impact of the war in Ukraine appears to have normalised. We expect lower paces of rate hikes by the Fed in 2023. In the domestic scene, however, we may see elevated inflation levels due to other structural factors including misaligned policies – at least for the first half of 2023.

The exchange rate in the foreign exchange market is expected to depreciate further in 2023 driven by a combination of weak FX inflows amid tightened global financial market conditions. Based on our estimates, we expect the exchange rate in the I & E window to range between N430-N500 in 2023.  However, we may see a decline in parallel market exchange rates in 2023 to N700 from the current N730 levels. We believe that the exchange rate in the parallel market overshot in 2022.

In the financial markets, we think that it will be a year of two halves. We expect yields in the fixed income market to decline in H1 2023 due to increased liquidity during the period amid fixed income maturities. In H2 2023, we see the trend a rising yield environment. Meanwhile, the losses of the fixed income market are the gain of equities market. We expect the equities market to benefit from the push-effect of increased liquidity in H1 2023 before the positive momentum reverses the trend in H2 2023.

Our expectations and outlooks were based on optimism that the economy could enjoy an upside and that 2023 could mark the U-turn of the country’s fortunes. Given that 2023 is an election year, we believe that the three leading candidates are positively disposed to a market-driven economy. However, we think that what matters is the political will, courage, and conviction to implement the required changes.

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