The past few years have been marked by a series of unexpected crises. Covid-19 set in quickly without warning, shaking up economies and business as usual in 2020 and translating the risk of a pandemic into reality. Just when we were recovering from this crisis in early 2022, Russia decided to attack Ukraine. This translated geopolitics into something tangible. Hence, both of these low-probability but high-impact risks materialised. Now in 2023 we should find a way out to a better and more sustainable world.
Wish list for 2023
Topping the list is an end to the war and a new beginning to a more stable era. Russia's brutal war of aggression appears to be a replay of a historical script from far back in time. Maybe the perpetrators have misread those history books wearing distorting reading glasses. The war may end in a number of ways. Let’s hope for some surprise that will put an end to this calamity. The scenarios foreseeing the end of the war may be as irrational and nationalistic as its beginning.
If geopolitical tensions decreased, energy prices would be restored closer to regular levels. At the same time, the 12-month consumer inflation rate could fall very low indeed. While negative inflation is not something to hope for, it is not completely inconceivable assuming that energy prices drop.
At the same time, major investments in the green transition in the US and Europe will go ahead inevitably. As a result, climate change will translate into concrete action. Recently, the United States passed the "Inflation Reduction Act", which provides for major incentives in support of businesses committed to the green transition.
Europe needs to respond to this. Many energy-related decisions in the EU have been taken at a record pace. When necessary, the response has been swift. On climate change, Europe must match the United States' efforts. Most likely, this type of contest is only beneficial for the planet.
While the Covid-19 virus is still with us, it has remained a controlled risk, at least in Europe and the USA. It appears that it will continue to plague China until the government introduces a major vaccine programme to contain the impact of the virus. On that score, China may have to draw upon western expertise.
A snapshot of the economy
Compared to the bigger challenges discussed above, the state of the economy is the least of the problems. Many people think that we are already in recession in places. Although the statistics are lagging a little behind, the next few months will probably show that the GDP is already falling.
When economic growth stalls, interest rates fall, and central banks can ease monetary policies. Forecasts suggest that the USA will soon see a shift in monetary policy towards a more accommodative stance and language, to be followed by Europe, in the first half of 2023. Monetary policies affect inflation expectations in response to dimming prospects and weaker economic performance. Compared to the effect of geopolitics on energy prices, monetary policy comes second. However, central banks do not want to remain idle; they simply need to do something.
The ability of the stock markets to foresee future developments is outstanding, to the extent that sometimes this foresight is premature or too quick, resulting in disappointments. But, as megatrends suggest, it is conceivable that a weaker economy and more moderate interest rates is exactly what stock investors are hoping for.
Will decision-makers succeed?
Over the past few years, political decision-makers have had a lot of tough nuts to crack. Things are not likely to get any easier, given the long list of problems awaiting solution. However, the most acute headaches always eclipse less urgent concerns.
We often think that it is the political decision-makers who take the real decisions. Of course, the decisions they make gain a lot of publicity. But the biggest and most important decisions are made by individuals, consumers and businesses. Their decisions drive economic dynamics more than those of political decision-makers. To ensure that their decisions are sound and contribute to the common good, we can only hope that the political ambience becomes less uncertain as it has been during 2020-2022.
Spreading civilization
The world order is in transition. The West possesses one superior weapon – the power of civilization. Enlightenment and civilization are a major resource. The past year has shown that the transition from barbarism to civilization must be reinforced to make the world a safer place. Civilization should be cherished irrespective of the economic or political system. After all, civilization is the West’s best export product.
In conclusion
The wish list for 2023 contains more wishes than predictions. One item is missing on the list, and it is not a minor one. So far in 2022, the world has been spared massive cyber events. Accordingly, we need to add to the list the wish that things will remain the same in 2023. In 2021, the Financial Times selected “This is how they tell me the world ends", a book about the cybercrime and security market, as the best business book of the year. As if anticipating the future, this year’s award went to a book called “Chip war”, not exactly a reassuring title as far as peace is concerned.
The writer is VER's CEO Timo Löyttyniemi.
