The World in 2023 – Themes for IFCs
(Part one)

A problematic vaccine roll-out, price-boosting supply chain problems, and trillions of additional dollars in spending saw inflation climb to 30-year highs. As former Treasury Secretary and Economist Larry Summers said, "a society where inflation is accelerating feels like a society that is out of control".

Efforts by the US to build a western coalition of liberal democracies to face China gained only modest traction, and COP27 produced statements of intent but not many new commitments other than an agreement to produce a report on climate reparation.

Notwithstanding, the liberalised western democracies have, for the moment, come closer together. But differences persist over digital taxation, trade agreements, and American tech. These tensions will be further exacerbated by the considerable relocation incentives implicit in the US Inflation Reduction Act, with European firms being enticed to America.

The adoption and implementation of a Global Business Tax can create further tensions with the EU pressing ahead and the US resting on the presumption that Gilti will be grandfathered and that moves on book income tax won't come under challenge.

Elsewhere in 2023, globalisation will continue to transition with shifting alliances, impacting investment decisions, especially in supply chains.

The UN vote on the War in Ukraine flushed out many countries who abstained and refused to condemn Russian action against Ukraine. The loose affiliation of the BRICs and China's increasingly assertive attitude toward the West under Xi Jinping, newly re-elected and de facto President for life, are all cause for concern. The West will need high-quality diplomatic skills if a glide path to the 'Avoidable War' with China, as described by former Australian Premier Kevin Rudd, is to be successfully dodged.

The first half of 2023 should see the West hold the line in the context of the War in Ukraine, but as the 2024 American election looms, the desire amongst American voters for a resolution will build. A settlement in the second half of 2023 policed by the UN may come onto the table, potentially creating significant tension with Ukraine.

Still, without substantially increased western military aid, it will be challenging for Ukraine to entirely rebuff Russia, absent a substantial change in the geopolitical status quo. Meantime, energy, and food security issues will persist. Winter 2023 will be a crunch time as the reserve stocks of gas and oil in the US and Europe are no longer available to tap.

Elsewhere in the world, autocracy is in rude health. We can expect to see political tensions in Latin America and Africa, where populism continues to undermine progress in democratisation and the rule of law. The top 20 states in the Fragile States Index are in LATAM, Africa and the Middle East. Iran and North Korea will continue to be regarded as pariah states and are now joined in an unholy trinity by Russia.

Labour will again take a more proactive role in a world short of workers and reassert its position in the triangular relationship with business and capital. Central banks wrestling with inflation will look to increase interest rates. And Finance Ministers will resist in the face of mounting debt servicing and pension costs and under pressure from angry voters.

In 2023 this trend will intensify due to a post-pandemic withdrawal of labour by huge cohorts of fifty and sixty-year-olds, although it remains to seen as to whether the Great Resignation is a temporary or permanent feature of labour markets.

Spurred on by inflation levels, the like of which we have not seen in decades, Trades Unions will seize the moment and look to reverse their decline. The situation in Britain will be challenging, with Brexit-induced labour shortages weighing heavy on the economy. A general strike is a distinct possibility in the UK.

Demographic reversal is a long-term structural trend, and a falling birth rate will only accelerate its impact. As a result, this could be Africa's decade, the only continent with an increasing number of young people. Still, many commentators believe that Africa needs more administrative capital to exploit the opportunity and that migration will increase.

With present-day inflation in double digits, stimulus and interest rate cuts would worsen matters; fiscal measures look complicated, with some countries experiencing taxation at 70-year highs. As we predicted in 2021/2022, Central banks and governments are boxed in with limited policy options. The world will likely experience a simultaneous recession, but the duration and depth are unclear.

The IMF has forecast global inflation to rise to 8.8 per cent in 2022 and decline to 6.5% in 2023 and 4.1% in 2024. Given the current cost-of-living crisis, there is ample opportunity for core inflation to rise and debt distress to manifest, especially in emerging and frontier markets. Still, whilst overall trade may reduce, the re-mapping of supply chains will continue as economic activity becomes more regionalised, with increased restructuring and new regional investment compensating, as countries respond to the new geopolitical and economic realities.

Recession may be looming, but innovation and productivity will receive a boost as firms fight inflationary forces through the more rapid adoption of AI, the promotion of energy efficiency measures, and the introduction of more flexible labour practices.

Part two of this post will be released next week.