WildCard Scenarios For 2023 And What Not To Worry About

2022 was a dramatic year in markets, economies and across geopolitics. 2023 may bring more of the same and even greater change. David Skilling and I have written that the next year(s) could be characterised by Clausewitz’ dictum that politics can be ‘war by other means’ in the sense that strategic competition between the large regions will be the dominant theme acting on international political economy. In this note, we focus on a key element of this – wildcard scenarios and also situations that we think the consensus is overreacting to.

The Eurasian Spring: Watch for regime change in Russia (on a cratering economy in 2023, together with ongoing evidence of military under-performance and institutional atrophy); unrest in China (as China grapples with the corner it has backed itself into on the pandemic, as well as the CCP’s constrained ability to deliver on its end of the bargain of improving economic outcomes); and near revolution in Iran (permission space will grow, but full regime change seems unlikely). And watch for political developments around Russia’s boundaries.

Sudden bull market on a stabilisation of growth and inflation – and a productivity renaissance. Behind the macro headwinds, there is ongoing business investment in innovation and new business models as well as technology advances (from AI to biotech and automation). Chat GPT is just one recent example.

Reconfiguration of the Middle East: There are tectonic moves underway as Israel develops links with the Arab World, and as Gulf states pivot towards Asia and carve out more independent positioning. Watch also for potential change in Iran’s behaviour in the region.

Tipping point on climate change: The increasing incidence of extreme weather is becoming increasingly obvious – from floods in Pakistan to European droughts. Watch for more extreme weather events to cause a public/political tipping point in global attitudes to climate change, leading to much more aggressive, fast-paced action to reduce emissions.

Covid’s back: The pandemic has become background noise in most countries (excepting China). Although cases and excess deaths continue to climb, there is no longer a significant economic impact in most advanced economies. But new variants continue to develop, and a more virulent strain could place substantial political and economic pressure on countries around the world.

Fintech becomes strategic: Big institutions and regulators seek to control networks and payment systems – this is happening in digital assets. ‘Old’ money banks and ‘new’ technology fintechs merge as strategic competition runs rife across finance – the race is on to build the financial networks of tomorrow.

Things not to worry about

Taiwan invasion: This is the biggest single risk in Asia, with potentially catastrophic consequences. And some assess the timing of an invasion by China has been brought forward. But our sense is that this is unlikely in the near-term: the economic costs are a major deterrent, as are the observations of the Russian invasion of Ukraine.

European financial crisis: Europe is seemingly perpetually exposed to risk – from rising rates putting pressure on European corporate and sovereign borrowers, to soaring energy prices leading to the deindustrialisation of Europe. But we assess the risks of a financial shock in Europe to be modest, and European industrial activity is adapting well to the energy price shock so far.

Hard Brexit: After the chaos of the Johnson and Truss administrations, UK politics is taking a moderate turn. The economic costs of Brexit are becoming clearer, and the centre of gravity is shifting towards accommodation. A rupture on Northern Ireland is unlikely for example. A prospective Labour government would also continue a slow walk towards better engagement with the EU. Although a formal reversal of Brexit remains very unlikely.

Nuclear shock: We don’t expect Russia to use nuclear weapons, although North Korea and Iran will continue to develop nuclear weapons and delivery capabilities.

Stagflation: This is not the 1970s – growth will pick up, labour markets remain strong (even if real wage growth has been widely negative), and inflation is likely to reduce sharply through 2023. The misery index remains much lower than the 1970s and is likely to remain so.