2023 Predictions Scorecard – A Look Back at a Year of Economic Turbulence
The Nobel laureate Niels Bohr once said, “Prediction is very difficult, especially if it’s about the future.” Back in January, I offered up my predictions for the coming year in an article titled 2023 Predictions – Brace for Volatility & Uncertainty to convey a strawman view for entrepreneurs about the uncertain macroeconomic environment they were going to face. My predictions were set against the backdrop of inflation in the 6%+ range (having peaked in June 2022 at 8.1%), the Bank of Canada having already increased its overnight rate 7 times in 2022, chatter about a potential recession, a volatile stock market, and rapidly slowing deal activity in venture capital (VC) and private equity (PE). While I was directionally correct on certain predictions, I was dead wrong on others.
2023 was an action-packed year with a particular emphasis on geopolitical tensions, regional bank failures, and corporate bankruptcies. We had to navigate notable events that shaped the business world in 2023, including: (1) the ongoing Russia-Ukraine war, (2) start of the Israel-Hamas war, (3) US bank failures of Silicon Valley Bank, Signature Bank, and First Republic Bank, (4) the rise of generative AI, (5) commencement of TikTok bans around the world, (6) announcement of high-profile bankruptcies, including WeWork, Convoy, Bird, Rite Aid, Mallinckrodt, Yellow Trucking Company, and Lordstown Motors, and (7) the 150%+ rise of Bitcoin. Other events that captured our attention include the corporate governance debacle at OpenAI, a Chinese spy balloon entering US airspace, a short-lived military mutiny in Russia, and actors and writers strikes in Hollywood. It also became clear in 2023 that we are all just living in Taylor Swift’s world as she continues her global dominance!
So, how did the predictions fare? Let’s find out.
Inflation
Prediction: Canada’s inflation rate will moderate over the course of 2023 but will remain at elevated levels throughout the year and into 2024. Inflation will end the year in the 3.5% to 4% range.
What happened: Canada’s inflation rate experienced a gradual decline over 2023 from 5.9% in January to 2.8% in June to 3.1% in November. November’s inflation rate remained unchanged from October’s mainly due to lower food, cellular, and fuel oil prices. The inflation rate is still not at the Bank of Canada’s 2% target, but it appears to be stabilizing. The prediction was generally correct, although inflation ended the year below the forecasted 3.5% to 4% range.
Grade: B
Interest Rates
Prediction: Bank of Canada will increase its overnight rate from 4.25% to 4.75% by the end of Q3 and then hold it steady heading into 2024.
What happened: The Bank of Canada increased its overnight rate from 4.25% to 4.5% in January to 4.75% in June to 5.0% in July, and has kept it steady at this elevated level through December. With inflation declining and stabilizing in both Canada and the US, the markets are beginning to price in rate cuts in 2024. The prediction was directionally correct, although the Bank of Canada increased rates to 5.0% in early Q3 instead of my prediction of 4.75% by the end of Q3.
Grade: B
Recession
Prediction: We will experience a mild recession in 2023.
What happened: A technical recession is defined as two consecutive quarters of negative GDP growth. My prediction was initially spot-on as it was originally reported that Q2 experienced a 0.2% decline in GDP, while GDP in Q3 contracted 1.1%. However, Q2 GDP was later revised to be a 1.4% gain instead of a 0.2% decline, thereby avoiding a recession in Canada and potentially signaling a soft landing for the economy.
Grade: F
Stock Market
Prediction: The stock market will experience volatility but will ultimately end the year higher than last year.
What happened: I expected the markets to be choppy in the first 9 months of the year before optimism sets in for Q4 (and beyond), pricing in the end of interest rate hikes. The prediction was very close to what actually happened. The markets were indeed volatile for the first 10 months of the year and then experienced a huge rally over the past 2 months on the back of easing inflation, economic strength, and corporate earnings growth, all leading investors to believe that interest rate cuts are on the horizon. Stock markets ended the year with significant gains – the S&P 500, NASDAQ, and TSX were up 24%, 43%, and 8%, respectively.
Grade: A
Venture Capital / Private Equity Activity & Fundraising Environment
Prediction: VC and PE deal activity will accelerate in 2023. The highest-quality companies will get funded, while the rest will still find it difficult to raise capital. Investors will continue to support companies that can demonstrate sustainable growth. VC and PE firms will face greater scrutiny from limited partners (LPs).
What happened: The VC and PE deal environment was slow in 2023 as the market felt the effects of higher interest rates, elevated inflation levels, and geopolitical conflict. Nontraditional investors and corporate venture investors left the venture ecosystem as they retrenched to focus on their investments over the past two years. According to Pitchbook, in the first 3 quarters, more than a quarter of deals were completed at a decreased or flat valuation. Companies pivoted from “growth at all costs” to “sustainable growth” strategies, which led to numerous layoffs, cost-cutting initiatives, and insider-led rounds for companies that required cash. High interest rates negatively impacted buyout activity, although there was an emphasis on take-privates and corporate carve-outs in the deals that did take place. From an LP perspective, the ones that deployed significant capital in recent years into venture funds navigated portfolio markdowns as valuations compressed in 2023. Also, given the lack of exits, “the rate at which capital is being distributed back to investors is at the lowest level since 2003.” As a result, we are seeing less LP appetite for venture capital, as evidenced by firms such as Greycroft and Insight Partners being forced to slash fundraising targets for their new funds. Anecdotally, we heard that many LPs used 2023 to prune their VC and PE firm relationships making future fundraisings more difficult.
Grade: C
Although it was fun to make these predictions, it’s clear that I should not quit my day job any time soon! 2024 is hopefully lining up to be a more upbeat year with signs of central banks potentially cutting interest rates and continued resilience in the economy. VC and PE investors are hoping The key theme for 2024 will be global elections as at least 64 countries representing almost half of the world’s population are expected to hold national elections, which will have a significant impact on the global economy and markets for years to come.
Wishing everyone a happy, healthy, and prosperous 2024!