12 events worth watching in 2023

The year 2022 was one of surprises: Russia’s invasion of Ukraine, continued inflation driven by energy costs, the collapse of the FTX and crypto markets, the revelations of the so-called Twitter Files, and one of the worst stock markets in recent history, to name just a few.

The year 2023 is expected to present some equally challenging circumstances. Here are 12 trends, events or surprises that may shape and define the year ahead.

1) Inflation returns

I may be the minority report here, but I don’t believe we’ve seen the end – or the worst – of inflation in the United States. I’d argue that following a lag where price growth appears to be moderating, CPI inflation is back in the 8-12 range percent, where it continues for the rest of the year. This would be cost-push inflation, not demand-pull (see the second point below), and a lagged result of a lag in the US money supply since 2009. Stagflation returns, when the index of misery (inflation plus unemployment) reaches to a new record level.

2) The US economy enters a recession

This is a less controversial proposition at this point, as most economists and analysts agree that a recession looks very likely for 2023. The first half of 2023 is expected to be characterized by negative GDP, rising unemployment and consumer insecurity. The wave of layoffs that began in the technology sector in 2022 is spreading to other industries and sectors, migrating from large corporations like Meta and Amazon to small and medium enterprises that are disproportionately affected by the slowdown.

3) The European energy crisis is getting worse

While in the near term Western Europe may be spared the worst possible outcomes due to a mild winter, the underlying factors that led to the energy crisis have not been resolved. Germany, the EU’s largest economy, made a Faustian bargain believing it could abandon its coal industry and any nuclear ambitions and instead put its faith in the Russians – against all historical experience – and a green utopia. France is similarly retreating from its path to energy independence – nuclear power – and is paying the price. While both have recently regretted those misjudgments, the road to recovery will take years, not months. Meanwhile, supply shortages will continue to plague these economies.

4) Performance of oil, crypto and gold

Energy markets will continue their bullish run for the foreseeable future as a result of ongoing supply disruptions and refinery constraints. Bitcoin and Ethereum are emerging from a long, dark crypto winter, but altcoins remain frozen. The dollar begins a long, albeit slow and turbulent slide from the 2022 peak as peak demand from rapidly rising interest rates eases.

5) Continue the rise of resource nationalism

The unforgettable geopolitical lesson of the pandemic era was that depending on real-time supply chains in countries that may or may not have another nation’s interest at heart represents a dangerous strategic folly. Good thing we learned this lesson when we did. Countries around the world are now working aggressively to realign their supply chains and ensure they have strategic resources in adequate supply to withstand Black Swan contingencies. Look for increasingly protectionist and nationalist policies to dominate trade discussions.

6) Traditional global alliances cease, new ones are created

Longstanding partnerships, such as the United States’ relationship with Saudi Arabia, have already begun to unravel. Expect further strengthening of the alliance led by China and Russia that includes former US allies, or at least non-aligned countries such as India, Turkey, South Africa and Brazil. The most vulnerable to geopolitical changes are countries in Africa, Southeast Asia and South America. Because of sanctions and foreign policy warfare Incoherent or at least inconsistent, the United States ends up in a net deficit situation, losing more friends than it gains in the process.

7) The dominance of the US dollar continues to erode

Hard money is making a comeback as commodity-backed currencies take the spotlight. Alternative payment systems, petrodollars replaced by petrorubles or petroyuans, as well as central bank-issued digital currencies, will all succeed in slowly eroding the US dollar’s share of global finance and trade flows.

8) The West, tired of the cost of the Ukraine war, is suing for peace

While it may be unrealistic to think that Russia can bomb the Ukrainian people into submission, the growing costs of supporting Ukraine’s war with Russia will challenge political leaders across the West. This fatigue will increase as more citizens begin to ask reasonable questions about whether hundreds of billions of dollars or euros might not be better spent tackling some of the local economic and social challenges these countries face at home. In the end, Western governments and Putin each decide that half a loaf of bread is better than no bread at all.

9) Domino effect of exposure

The latest exposure of high-level fraud and corruption involving US government agencies and officials continues. Increased transparency leads to accountability. Eventually, the evidence becomes too overwhelming to ignore; arrests, trials and convictions will follow. Congressional hearings lead to a wave of resignations and first steps toward fundamental institutional reform.

10) China is barking, but not biting, in Taiwan

While we should expect the growling and barking to increase, with more frequent airspace innovations, naval activity, intimidation and outright threats, it is highly unlikely that China will invade Taiwan in 2023. While China would certainly prefer to confront Taiwan while the Biden administration remains in power, rather than face an unlikely return Donald Trump’s presidency, Xi Jingping’s government will conclude that they are not prepared, militarily, politically or otherwise, to invade Taiwan. Domestic problems, including a worsening economy and growing social unrest within mainland China, will mean that a spat with the United States and other Western trading partners remains untenable for now. While Russia could get by without selling gas to Germany, there is no way the Chinese economy could survive if it suddenly cut off from the US and Western Europe.

11) Recovery of the second half in the economy and markets

While I am not optimistic about the first half, I take great comfort in the breadth and resilience of the American economy. There is huge untapped potential in oil and gas, offshore manufacturing, supply chain realignment, and new technologies such as artificial intelligence, quantum computing, blockchain, and cold fusion.

12) More of the same

What could further derail a V-shaped recovery are the same forces that helped bring about the recession: poor policy decisions that continue to hurt our energy industry, keep our borders insecure, and fail to dismantle the out-of-control regulatory bureaucracy that is stifling innovation in energy, manufacturing, financial services and technology. These are some of the largest sectors of the economy and those most adversely affected by the Biden administration’s careless return to Obama-era economic policies.

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