My Economic Predictions for '23

[LondonFinance1]

Predicting the future is a mug's game as Douglas Adams famously said, but after a tumultuous three years, 2023 might turn out to be a bit calmer, so I’ll give it a try. In general, I am quite optimistic about the year to come.

The most important development to look at is the war in Ukraine. With Russia ot making any advances and even rumours that it might run out of ammunition in the not too distant future https://www.economist.com/the-economist-explains/2022/12/20/is-russia-running-out-of-ammunition, my bet would be that there will be some sort of agreement to end active hostilities by summer. This might not cover all of the current Ukrainian demands (e.g. a full Russian withdrawal, including Crimea https://www.nytimes.com/2022/12/28/world/europe/ukraine-russia-peace-talks.html), but it will definitely bring some respite to international energy and food markets. A textbook example of how external shocks can also be positive.

Coupled with a regime change in Iran https://www.euronews.com/2022/12/20...neration-z-will-the-unrest-lead-to-revolution this should calm energy markets and prices should drop down to 2021 levels or even further, given that there has been a lot of energy diversification and saving efforts in most of the major markets.

This in turn will help to dampen one of the main drivers of the current high rates of inflation. This gives me hope that current levels of inflation will not persist for a longer period of time, but were a one-off caused by the increase of monetary supply as part of the early reactions to Covid, similar to the Bullwhip Effect https://en.wikipedia.org/wiki/Bullwhip_effect.

Taken together, this should lead (again) to lasting lower levels of interest rates (or at least no further raises) which will help to dampen recessions https://www.cnbc.com/select/how-do-increasing-interest-rates-affect-inflation/. The worst-case economic scenario at the moment is a combination of high interest rates as a result of an increased money supply after Covid leading to higher interest rates as central banks try to dampen inflation according to their inflation targets, e.g. 2% for the European Central Bank. High interest rates further dampen growth or push countries into recession. You might have come across the term stagflation https://www.economist.com/the-world-ahead/2022/11/18/companies-must-battle-the-beast-of-stagflation - companies would be faced with rising cost, but stable or dropping sales. If managed well, this can go on for a while, but could put cost pressure on companies which might decide to lay off workers to save cost and/or because they are not needed if demand fall. Higher rates of unemployment will deepen a recession (lower consumption leads to further stagnation, the state needs to pay more in benefits and might be forced to raise taxes, further squeezing the economy.

In the more positive scenario, capital markets will look different as well as higher interest rates usually push down share prices https://www.forbes.com/sites/qai/20...estors-adjust-as-rates-go-up/?sh=5fc97e50b0fd - one reason is that the net present value of investments is discounted with higher interest rates, so NPVs are lower. Once interest rates drop again, options like venture capital should be coming back.
What could spoil this recovery? Should the war in Ukraine not end, inflation might stay higher for longer. Central banks could be overly cautious and not lower interest rates or at least do so at a lower speed than required for a recovery.

Let’s have a look at potential trouble spots for 2023. Despite all of the belligerent rhetoric, nothing will happen to Taiwan in 2023. After suddenly dropping all Covid restrictions, China will be far too busy with dealing with waves of infections and their aftermath https://www.economist.com/china/2022/12/28/covid-19-is-tearing-through-china The more interesting question is the economic consequences of this chaos (there could be hundreds of millions of Covid cases) and also if a dip at the beginning of 2023 can be compensated by higher growth later in the year. This could also mean the arrivals of new variants which might even be resistant to vaccines, so there could be a scenario with fresh lockdowns on the horizon. I think this is unlikely and there is a whole arsenal of preventive measures that could be used first.
On a different note, some companies are moving out of China or at least looking for alternatives https://www.economist.com/business/...-firms-are-finding-it-hard-to-let-go-of-china, so all this might mean that we get some more talk whether we have seen “Peak China”.

At least geographically close to China is North Korea, but it seems that despite the usual threads, there will be no major escalation https://www.bbc.com/news/world-asia-64123657

The coming elections in Turkey https://www.reuters.com/world/middl...inging-elections-slightly-forward-2023-01-02/ might get messy and the ruling party could be tempted to stir some trouble in the run-up, e.g. with Greece over some islands, but hopefully mutual allies will convince Turkey to act with restraint. After all, both countries are members of NATO.

On a longer term, climate change and its effects (average temperatures raising with hot summers, but also cold spells in winter in Europe) will continue to be the biggest challenge to be tackled, but this is unfortunately not a job to be done with a year. A global raise by temperatures below 1.5 degrees would mean that most of the Tropics will remain habitable https://www.theguardian.com/science/2022/jul/31/why-you-need-to-worry-about-the-wet-bulb-temperature - the reverse scenario is almost unthinkable white 100s of millions forced to migrate because their current home will become uninhabitable as the human body is unable to bear extreme heat over a prolonged period of time https://climate.nasa.gov/ask-nasa-c...-change-may-make-some-places-too-hot-to-live/.

As for the UK – not much joy, unfortunately. I think that there is a 40:60 chance to see a new Prime Minsiter before Summer. To stand a realistic chance in the 2024 elections, Sunak has to win both the general public with polling among younger voters abysmally low (2 % for those aged 18-24, 15 % for 25-49 https://www.politicshome.com/news/article/conservative-millennial-problem-polling-young-voters ) as well as his own party and backbenchers. This will be tricky in the best of times, but almost impossible if you need to introduce unpopular measures, cutting spending and increasing taxes at the same time in a period of economic turmoil. On top of that, he will also need to convince his backbenchers who will rebel against anything that will smell of cooperation with the EU https://www.theguardian.com/comment...ainty-was-tory-chaos-could-2023-be-even-worse. Should a decade of real estate price growth be wiped out https://www.bloomberg.com/news/articles/2022-12-29/podcast-how-uk-house-prices-could-fall-by-30, the next general election will be interesting indeed.
There is also the small detail of full border controls with the EU finally coming into force (unless they are again voluntarily postponed by the UK), so it is no surprise that economists expect the UK inflation to last for longer than in other countries and its economy to underperform https://www.ft.com/content/81fbdff6-dacb-476b-a4ba-12696e7f7800

To look into the crystal ball a bit further and to make this more fun, my predictions for capital markets at the end of 2023 would be: S&P 500 up by 10% to 4250, NASDAQ 100 up by 15% to 12500, FTSE 100 5% up to 8000. Bitcoin will close the year at USD 22500 with quite some up and downs. (Note that these are my own opinions and do not constitute any investment advice etc.)

I’d be happy to hear your thoughts on this. Feel free to prove me wrong or post sources that tell different stories. As for the mug’s game, I will revisit this post in 12 months to see what has turned out to be true and what not.

 

[JustAnotherHuman1]

Really insightful, thanks for sharing your knowledge. You draw some interesting connections, like China surpassing its peak. Is it not strongly projected to overtake the US as the worlds biggest economy in a couple of decades or sooner though? Fair enough some companies might be leaving and move to other 3rd world countries, but that might seem like a dip as China has massive industrial capacity. Re the COVID outbreak, there were so many protests going on that if they didn’t lift restrictions probably Xi would had fallen by now? They are also unwilling to use western vaccines for whatever reason, I reckon political.

Climate change is scary, but I think the extreme heatwaves this summer was a wake up call as people started to experience it on their own skin. Whereas before it was just all data. Where do you think that 100 million people will move to if that scenario realizes? Europe is already struggling with the migrant crisis, obviously this is not felt in UK which is an island but is a reality. There is quite a lot of going on with the recently announced huge US green package vs the European one as well, which is kind of a small detail though in the grand scheme of things.

How do your see the EUR vs USD exchange rate pan out in the next decade?

I’d say we will see stagflation for some time rather than simply inflation which is a lot worse than just inflation. I guess the global economy will stagnate and growth is to happen much later, I don’t have an as rosy outlook as you do. Reckon we are entering a different decade now, most mid level rank professionals never experienced a high interest rate environment in their career and so a now tight monetary policy will surely impact compensation in a negative way going forward. For instance GS cut bonuses in like half this year.

 

[LondonFinance1]

Really insightful, thanks for sharing your knowledge. You draw some interesting connections, like China surpassing its peak. Is it not strongly projected to overtake the US as the worlds biggest economy in a couple of decades or sooner though? Fair enough some companies might be leaving and move to other 3rd world countries, but that might seem like a dip as China has massive industrial capacity. Re the COVID outbreak, there were so many protests going on that if they didn’t lift restrictions probably Xi would had fallen by now? They are also unwilling to use western vaccines for whatever reason, I reckon political.

Climate change is scary, but I think the extreme heatwaves this summer was a wake up call as people started to experience it on their own skin. Whereas before it was just all data. Where do you think that 100 million people will move to if that scenario realizes? Europe is already struggling with the migrant crisis, obviously this is not felt in UK which is an island but is a reality. There is quite a lot of going on with the recently announced huge US green package vs the European one as well, which is kind of a small detail though in the grand scheme of things.

How do your see the EUR vs USD exchange rate pan out in the next decade?

I’d say we will see stagflation for some time rather than simply inflation which is a lot worse than just inflation. I guess the global economy will stagnate and growth is to happen much later, I don’t have an as rosy outlook as you do. Reckon we are entering a different decade now, most mid level rank professionals never experienced a high interest rate environment in their career and so a now tight monetary policy will surely impact compensation in a negative way going forward. For instance GS cut bonuses in like half this year.

Don't get me wrong: China is still a massive success story on an unbelievable scale, lifting 300m+ people out of poverty along the way, but there are voices that it might not surpass the US https://www.economist.com/the-world...chinas-economy-ever-overtake-americas-in-size. China is ageing rapidly (partly thanks to the one-child policy of the past), there are hidden risks (e.g. overvalued property investments or non-performing loans) that would have been exposed and contained a lot earlier in a market economy. It is also a victim of its own success as other countries offer cheaper ways of production nowadays. India is going to surpass China as the most populous country this year.

The important thing to keep in mind about climate change is that it will lead to migration into more moderate zones on an unprecedented scale. Look at what is happening in the UK populist discuss at the moment and imagine what would happen if that migration would be 100x more. I have found this article quite interesting https://www.economist.com/interacti...ll-the-haj-change-as-global-temperatures-rise on how Saudi Arabia tries to cool down the Haj pilgrimage – this massive effort is probably not something to be replicated everywhere (not least because of the cost involved).

As for the USD vs EUR exchange rate: there is a flight to safety into the dollar in terms of crises, so the Euro should appreciate against the dollar (and other currencies) once we get into calmer waters. At the moment, US interest rates are also higher than in the Eurozone, so all other things being equal, it is more profitable to hold dollars rather than euros https://www.thebalancemoney.com/what-is-an-interest-rate-differential-1344962 .

 

[JustAnotherHuman1]

Don't get me wrong: China is still a massive success story on an unbelievable scale, lifting 300m+ people out of poverty along the way, but there are voices that it might not surpass the US https://www.economist.com/the-world...chinas-economy-ever-overtake-americas-in-size. China is ageing rapidly (partly thanks to the one-child policy of the past), there are hidden risks (e.g. overvalued property investments or non-performing loans) that would have been exposed and contained a lot earlier in a market economy. It is also a victim of its own success as other countries offer cheaper ways of production nowadays. India is going to surpass China as the most populous country this year.

The important thing to keep in mind about climate change is that it will lead to migration into more moderate zones on an unprecedented scale. Look at what is happening in the UK populist discuss at the moment and imagine what would happen if that migration would be 100x more. I have found this article quite interesting https://www.economist.com/interacti...ll-the-haj-change-as-global-temperatures-rise on how Saudi Arabia tries to cool down the Haj pilgrimage – this massive effort is probably not something to be replicated everywhere (not least because of the cost involved).

As for the USD vs EUR exchange rate: there is a flight to safety into the dollar in terms of crises, so the Euro should appreciate against the dollar (and other currencies) once we get into calmer waters. At the moment, US interest rates are also higher than in the Eurozone, so all other things being equal, it is more profitable to hold dollars rather than euros https://www.thebalancemoney.com/what-is-an-interest-rate-differential-1344962 .

There are definitely structural issues in that economy, but other emerging markets are not too much better off either as you point out. Even if they have a larger population they still might be lacking total area of land, technology or infrastructure or any combination of these. China is best out of all three.

What I never understood about the UK is that it sells itself as a tolerant society but actually hidden somewhere there is a fair amount of xenophobia. What are your thoughts on the incompetence of the previous gov and when they crashed the GBP with the mini budget?

If there is flight to safety into dollar doesn’t that mean that the dollar appreciates and the euro rather depreciates?

 

[curious_finance1]

I think everyone agrees, 2023 is a recession year. It is hard to predict the actual impact at this point, given that the money supply on a global scale is unheard of, we are flirting with serious trouble, and rising the interest rates is the only tool at our disposal to fight the scary inflation.

I am also concerned about the fluctuations in every market, volatility makes it so hard to take a decision for all of us depending on the decision we have to take ahead. Currency, international dependency due to supply chain, capital markets, debt , energy : everything seems to be very risky right now and we all have to pay a price.

But what is there to do in such cases? what has history taught us? What is the best way to not only ride the storm but actually to have built something solid and great by the time the recession has ended? Just looking to inject some positivity and remind us all to be aware of what is happening around and how we can get the most out of it

 

[LondonFinance1]

There are definitely structural issues in that economy, but other emerging markets are not too much better off either as you point out. Even if they have a larger population they still might be lacking total area of land, technology or infrastructure or any combination of these. China is best out of all three.

What I never understood about the UK is that it sells itself as a tolerant society but actually hidden somewhere there is a fair amount of xenophobia. What are your thoughts on the incompetence of the previous gov and when they crashed the GBP with the mini budget?

If there is flight to safety into dollar doesn’t that mean that the dollar appreciates and the euro rather depreciates?

I should have been a bit clearer: the flight to safety has already happened. Once things get better (all things being equal), this should be reversed. Interest rate differentials and different rates of recovery might go into a different direction.

As for the UK - after more than a decade in power, the Conservatives do not have much talent left, there have been several purges, so that only Brexit purist stood a chance - Brexit being the ultimate triumph over expertise and knowledge ("we all had enough of the experts"). Adding to that are the palace intrigues and you end with five Education Ministers in one year. For some more reading https://unherd.com/2023/01/liz-truss-still-haunts-the-tories/ is a really good article.

The way out should be abolishing first past the post to something more representative (the stability argument went out of the window a long time ago). It should also be possible to serve as a minister without being an MP, at least as a junior minister (I know there is the deroute via the Lords)