Big plans for your portfolio companies in 2023? Look before you leap – see this economic forecast for more details.
Recessionary fears. Inflation. Interest rates. Private equity firms don’t have to consult a crystal ball to know that there’s a strong chance of economic turbulence in 2023.
The prospect of market volatility this year was part of the discussion during “Economic Outlook and Today’s Credit Markets,” the opening session of the Crowe Expertise Week series for private equity. Most attendees saw 2023, at the very least, as a soft year for U.S. macroeconomic growth. When asked about their expectations for the U.S. economy in 2023, nearly two-thirds of the 350-plus voters in the event poll predicted no growth, a mild recession, or a deep recession.
Also, when asked what they’re most concerned about in 2023, the top three answers were:
- Recession: 30%
- Inflation: 28%
- Interest rates: 22%
Those responses relate to each other, of course, and they’re the product of some key underlying economic factors.
Price stability is a big objective for the Federal Reserve, which hiked interest rates starting last year. The Fed’s standard for price stability is 2% annual inflation, but a more practical definition is “a rate of inflation that you don't have to worry about at all.”
While inflation has been coming down from the 40-year highs seen mid-2022, it still has a way to go from the 6.4% Consumer Price Index rate reported in January before it gets to the Fed’s targeted rate.
Despite recent layoffs across several sectors of the economy, the continuing imbalance between labor demand and supply is likely to prolong today’s elevated levels of inflation and interest rates as U.S. businesses look to fill more than 10 million open positions.
Despite these headwinds, there are some encouraging signs that might lessen the depth and duration of any recession later in 2023:
- Various pressures causing supply chain disruptions have declined significantly over the past two years.
- Money saved during the pandemic is flowing back into the economy.
- Home prices at a national level have declined from their 2022 peak, which will help ease overall inflation.
Whether or not the U.S. economy slips into a recession this year, elevated interest rates, rising costs, and labor shortages will persist for a while. Private equity groups and their portfolio companies will need to continue to adjust accordingly.
In the weeks ahead, we’ll share more private equity insights from Crowe Expertise Week on topics ranging from the impact of tax reform on current transactions to deal considerations in turbulent markets.
