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Barclays projects recession in 2023, sees cash as attractive safe-haven

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(Kitco News) - Cash could be king in 2023 as rising interest rates are expected to push the global economy into a stagflationary recession with lower growth and higher inflation, according to economists at Barclays.

In its 2023 outlook report, the British bank warned that economic activity next year could be the weakest the world has seen in the last 40 years as they expected global growth of only 1.7%. The bank sees the European economy shrinking by 0.8% and the U.S. declining by 0.1% in 2023.

"The global economy is entering a phase with low growth but still-elevated inflation. Europe is about to enter an energy-driven recession, the U.S. is slowed by tighter financing conditions," the economists said.

Although the global economy is expected to slow, the economists warned investors that central banks will continue to raise interest rates to bring inflation pressures down. The bank sees the U.S. Fed Funds rate pushing above 4.5% next year. However, the economists also noted that instead of trying to figure out how far the Federal Reserve will take interest rates, investors should pay more attention to the duration.

"In our view, the endless debate over the peak policy rate misses this important point. What matters more than the peak, in our view, is that rates will be high even with advanced economies in a recession. Inflation might fall, but not quickly enough to allow officials to ease quickly," Barclays said.

"Central banks have signaled that hikes will pause early next year, but a pause is not a pivot. With inflation unlikely to fall quickly enough, in our view, 2023 could be the first year in decades when monetary policy in the U.S. and Europe will be restrictive even with economies in recession. That sets the stage for a very sluggish recovery in 2024."

In this environment, Barclays sees cash as the biggest winner in the next year.

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"Bonds have massively underperformed equities in 2022, and we now see limited downside in longer U.S. fixed income. If forced to choose between stocks and bonds, we would be overweight core fixed income over equities," the analysts said. "But cash should be the real winner of 2023, with U.S. front-end yields likely to go to 4.5% or higher and stay there for several quarters. The ability to earn over 4% while taking virtually no risk is a factor that should drag on both stock and bond markets next year."

Although the U.S. dollar is an attractive safe-haven, Barclays' economists said that they expect to see the greenback relatively range-bound at current elevated levels.

"Dollar gains are set to slow and we have shifted neutral, even as a secular downtrend is still quarters away. Slower gains emanate from the gradual convergence to the end of the Fed's hiking cycle," the analysts said. "That said, there is still a high bar for a near-term global growth rebound, which is a necessary condition for lasting dollar weakness."

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