The three biggest investment risks in 2023 are housing prices, central bank rate hikes, and energy volatility, said Ivo Pezzuto, Professor of Economics and Digital Transformation at ISM Paris.
“The three elements include the central banks… will they crash the system with rate hikes, or will they tame inflation without causing much damage?” He said. “The other ones are the energy shortage we’re seeing in Europe, and then housing.”
He also predicted that geopolitical tensions will be less of a concern in the new year, saying that “the last thing Europe can handle now, and I would say also NATO and the U.S., is another geopolitical instability and conflict in Europe while we have this Ukraine conflict.”
Pezzuto spoke with David Lin, Anchor and Producer at Kitco News.
Rate Hikes
Central banks worldwide have been hiking interest rates to stem inflation, with the U.S. Federal Reserve increasing rates by 425 basis points over the year. Pezutto said that although tight monetary policy “would do some damage” to the economy, a “severe recession” is unlikely.
“I don’t think it is going to be devastating,” he said. “They [central banks] can always reverse [rate hikes], and slow down the process.”
However, he added that “the early warning indicators, leading indicators, and forward-looking” indicators suggest that a recession is coming.
“They all add in the direction below the threshold, meaning towards a contraction of the economy, if not a recession or even worse,” he said. “That’s the direction if [central banks] keep pushing interest rates higher.”
Housing
As the Fed tightens and the economy faces a possible recession, housing prices have started to cool, with the S&P/Case-Shiller Home Price Index falling since June of 2022.
Pezzuto said that Fed rate hikes will particularly affect those on adjustable-rate mortgages.
“If you have a fixed-rate mortgage, then that doesn’t affect you too much,” he said. “But for adjustable rates, that might be a problem, for example in the U.S.”
According to the Mortgage Bankers Association, 9 percent of new home loans in September 2022 were adjustable-rate. “Housing is a big piece of the economy,” Pezzuto observed. “If you look at the Consumer Price Index, the housing part has by far the biggest weighting in the CPI basket. A continuous decline in house prices in 2023 could offer the Fed a reason to claim victory over inflation.”
To find out Pezzuto’s outlook for energy markets, watch the video above
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