We had a chat with Fairown’s CEO Hendrik Roosna to reflect on the economic outlook for 2023 and how it will affect financial stability and overall market conditions.
Every spring, Hendrik visits the Goldman Sachs conference in New York to get genuine insights and visions from industry leaders. This also enables him to align Fairown’s strategic plans and be prepared for what’s ahead.
The programme covered a broad range of topics, including finance, economics, and politics. Today, Hendrik shares with us key takeaways from the conference for 2023.
Interest Rate Hikes Are Likely Behind Us
What's going to happen with rate hikes? According to the consensus in the US, extreme rate hikes are likely behind us.
Several factors impact this:
problems in supply chains have driven inflation, and with China removing COVID restrictions, supply chains are returning to pre-2019 levels;
residential real estate rent growth has slowed significantly from its peak in 2021;
the labor market has been balancing out, resulting in a significant reduction in hiring, and layoffs have gone from very low to low. Employment productivity has been steady at 1.5% per annum, but Goldman Sachs Generative AI suggests it could double the productivity growth over the next decade, which could be a game changer.
What Financial Risks Can Emerge?
While the probability of systemic risk and a deep recession is only 35%, there are still some risks that could emerge:
government debt ceiling;
struggle for regional banks to raise capital after the collapse of Silicon Valley Bank and Signature Bank, leading to stricter lending and limiting SMEs' access to debt capital;
higher interest costs for both companies and consumers which cannot be covered from income growth;
a significant part of Class B and C commercial real estate is becoming useless and needs demolition which could affect the creditors who financed those properties.
How Do Interest Rates Influence the Economy?
There needs to be more economic growth ahead of us to offset the higher borrowing costs, but the current state of the economy can handle that.
The consensus view is that having a more predictable environment overweighs the higher lending cost. The economy is on the verge of finding a new balance for economic growth at these new rates.
How Will Real Estate Play Out?
Consumer real estate prices are expected to drop by up to 6%. Still, overall offerings on the market have reduced by 40%. US consumers have fixed-rate 30-year mortgages and people hold on to their homes, because taking out a new mortgage would be expensive due to the rate hikes.
Despite high rates, the US has a low housing supply, leading to more transactions in Q1 2023. It shows that 2022 was the actual bottom for the consumer real estate market, and the demand is rising even though market circumstances are not supporting it.
Start of the Year Looks Optimistic
Ramp, a fintech firm that offers a platform for corporate card and finance automation, conducts regular surveys of the plans of its customers' CFOs. In 2022, the focus was on reducing costs and layoffs. However, based on the same data, companies are already discussing investments and hiring in the first quarter of 2023.
While there are some risks to the economy, the general view is that things are looking up in 2023, and the economy is likely to find a balance on these new interest rate levels.