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Chicago Booth experts convened in January to discuss global issues at the first of several annual Economic Outlook 2023 forums. Their insights come at a time when the world continues to emerge from the social and economic disruptions of the COVID-19 pandemic, with countries and companies struggling under a host of problems. These include the worst inflation and the highest interest rates in 40 years, shifts in supply chains and the labor force, and the threats posed by climate change and ongoing geopolitical tensions.

This year’s panel consisted of Wenxin Du, professor of finance and a Fama Faculty Fellow; Randall S. Kroszner, the Norman R. Bobins Professor of Economics; and Raghuram G. Rajan, the Katherine Dusak Miller Distinguished Service Professor of Finance. The forum was moderated by Kathleen Hays, global economics and policy editor for Bloomberg Television and Radio. During opening remarks, dean Madhav V. Rajan noted Booth’s 125th anniversary and highlighted Economic Outlook as a prime example of the school’s long history of informing public discourse.

The event—the first in-person Economic Outlook forum since the advent of COVID in 2020—was held at the Sheraton Hotel in downtown Chicago and was attended by approximately 350 guests as well as more than 600 online participants. Panelists weighed in on a wide range of topics, including the US Federal Reserve Board’s efforts to tame inflation by raising interest rates, the chances of a rate cut, the state of markets as China loosens its COVID restrictions and the country reopens, and broad concerns heading into the new year.

How High Will Interest Rates Go?

鈥淚鈥檝e been saying for a while it will be mid-fives,鈥� said Kroszner. 鈥淲e鈥檙e still in a period where unemployment is at a 50-year low, and the Fed is waiting for the labor market to crack before pausing.鈥�

Rajan agreed but added that wage growth has slowed and there is some evidence鈥攅specially in the tech sector鈥攖hat layoffs are increasing. 鈥淭he Fed is looking for signs that will allow it to slow down,鈥� he said.

The reason the Fed is being so cautious is that it doesn鈥檛 want to be responsible for triggering a deep recession, Rajan added, 鈥渆specially since Congress has just spent $6 trillion on the best recovery money can buy.鈥�

Whether mid-fives will be enough remains to be seen. 鈥淚 don鈥檛 think anyone knows,鈥� said Rajan. 鈥淭he Fed has certainly done enough to counter criticism that it is behind the curve. But beyond that, I think you have to be a little agnostic and admit that there鈥檚 a lot of unknowns, a lot of possibilities. The Fed鈥檚 biggest fear is if they pause or stop, people will start spending again and the whole problem will just repeat itself.鈥�

The panelists generally agreed that there would likely be a mild recession toward the end of the year.

鈥淭he Fed has enough tools to keep the situation from getting out of control,鈥� Du said. 

Kroszner commented that the Fed is hoping to achieve an 鈥渋mmaculate disinflation鈥� that avoids both a recession and any increase in the unemployment rate. The problem, he said, is that 鈥渨e鈥檝e never seen that happen before and I don鈥檛 think it鈥檚 likely.鈥�

Is There Any Chance of a Rate Cut?

The panelists as a group expressed doubts about the possibility of the board cutting rates. Riffing on a famous line from 1980 speech by Margaret Thatcher, Kroszner said, 鈥淭he Fed is 鈥榥ot for turning,鈥� for pivoting.鈥�

He added that 鈥渢he last time inflation rates were this high was 40 years ago, and back then interest rates were in the double digits. People have lost context on this because it was two generations ago. But that is why Fed chairman Jerome Powell keeps referencing Paul Volcker and the importance of not pivoting too early.鈥�

Rajan commented that the reason the Fed is taking a hard stance on inflation is because it lacks credibility as an inflation fighter.

鈥淲e鈥檙e coming out of a period where inflation was very low and the Fed鈥檚 job was actually to get the inflation rate up,鈥� he said. 鈥淣ow the dynamic has changed and they have to convince the market that they mean what they say.鈥�

There is one big asterisk, however. 鈥淚f we鈥檙e clearly going into a recession and we start seeing big job losses, they may cut rates mildly,鈥� Rajan said. 鈥淏ut probably not this year.鈥�

How Will the Reopening of China Affect Global Markets?

Among the range of opinions this question elicited, Du offered, 鈥淚t鈥檚 going to take a while for the Chinese domestic market to come back, but when it does there will be strong pent-up demand.鈥�

Rajan added, 鈥淎s Chinese demand comes back, it鈥檚 going to put upward pressure on global commodity prices.鈥� An example, he said, is natural gas. 鈥淓urope is currently benefiting from lower natural gas prices because the Chinese have not been competing. That will change in the next year.鈥�

Kroszner, however, offered some hope on that front. 鈥淕ermany recently built a liquified natural gas plant in six months. This would normally have taken three years. They did it by streamlining and eliminating a bunch of regulations. There鈥檚 a real lesson there that if you put your mind to it, you can really get things done.鈥�

Kroszner also expressed doubts on the revival of the Chinese domestic market. 鈥淭here has always been a very high personal savings rate in China because of a lack of trust in the government to provide healthcare and other services. The lesson people have learned from the pandemic is that this will continue. So while the domestic market will definitely come back, it won鈥檛 snap back quite like the US did.鈥�

China also plays into predictions regarding the global supply chain. Because of the disruptions caused by the pandemic and the war in Ukraine, companies are looking to expand their options. 鈥淓verybody wants what I call a China Plus One policy,鈥� said Rajan. 鈥淐ompanies want more flexibility with their supply chains. Instead of just-in-time, they鈥檙e moving toward a just-in-case strategy.鈥�

The economic upsets of the past few years have also scrambled the outlook for emerging markets such as India, Brazil, Mexico, and the Philippines. 鈥淚f you take them as a group, they had a bad pandemic. The upper classes did well but the governments couldn鈥檛 support the lower middle classes with the kind of fiscal transfers that happened in developed countries,鈥� Rajan said. 鈥淚n India, for example, auto sales are going through the roof but scooter and motorcycle sales鈥攚hich is how the lower middle class gets around鈥攁re still on a downward trend.鈥�

The result, he said, is that 鈥渢he lower middle class is hurting and that is starting to have an effect on politics. People want change.鈥�

What Are the Wild Cards for 2023?

鈥淚 worry about climate change and how little we鈥檙e doing about it,鈥� said Rajan. 鈥淚 worry that we鈥檙e going to see big catastrophes that will lead to enormous migrations and chaos in the developed world.鈥�

Du expressed concern about government inaction. 鈥淚鈥檓 very worried about political polarization and the ability of governments to function,鈥� she said.

Kroszner noted that the possibility of geopolitical tensions exploding into 鈥渉ot wars鈥� remains very high. In addition to the war in Ukraine, 鈥渢here鈥檚 currently a war in Yemen and there are problems in Iran and the Middle East. And then there鈥檚 China and Taiwan. So I would say that鈥檚 the big thing that鈥檚 very difficult to put probabilities around, but that I would worry about.鈥�