From inflation to energy shortages and general instability, markets are set for a turbulent year ahead.
Those who come bearing warnings are rarely popular. Cassandra didn’t do herself any favors when she told her fellow Trojans to beware of the Greeks and their wooden horse. But, with financial markets facing unprecedented turbulence, it’s important to take a hard look at economic realities.
Analysts agree markets face serious headwinds. The International Monetary Fund has forecast that one-third of the world’s economy will be in recession in 2023. Energy is in high demand and short supply, prices are high and rising and emerging economies are coming out of the pandemic in shaky conditions.
There are five fundamental — and interlinked — issues that spell trouble for asset markets in 2023, with the understanding that in uncertain environments, there are no clear choices for investors. Every decision requires trade-offs.
Net energy shortages
Without dramatic changes in the geopolitical and economic landscape, fossil fuel shortages look likely to persist through next winter.
Russian supplies have been slashed by sanctions related to the war in Ukraine, while Europe’s energy architecture suffered irreparable damage when a blast destroyed part of the Nord Stream 1 pipeline. It’s irreparable because new infrastructure takes time and money to build and ESG mandates make it tough for energy companies to justify large-scale fossil fuel projects.
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Meanwhile, already strong demand will only increase once China emerges from its COVID-19 slowdown. Record growth in renewables and electric vehicles has helped. But there are limits. Renewables require hard-to-source elements such as lithium, cobalt, chromium and aluminum. Nuclear would ease the pressure, but new plants take years to bring online and garnering public support can be hard.
Reshoring of manufacturing
Supply chain shocks from the pandemic and Russia’s invasion of Ukraine have triggered an appetite in major economies to reshore production. While this could prove a long-term boon to domestic growth, reshoring takes investment, time and the availability of skilled labor.
In the short to medium-term, the reshoring of jobs from low-cost offshore locations will feed inflation in high-income countries as it pushes up wages for skilled workers and cuts corporate profit margins.
Transition to commodities-driven economies
The same disruptions that triggered the reshoring trend have led countries to seek safer — and greener — raw materials supply chains either within their borders or those of allies.
In recent years, the mining of crucial rare earth has been outsourced to countries with abundant cheap labor and lax tax regulations. As these processes move to high-tax and high-wage jurisdictions, the sourcing of raw materials will need to be reenvisioned. In some countries, this will lead to a rise in exploration investment. In those unable to source commodities at home, it may result in shifting trade alliances.
We can expect such alliances to mirror the geopolitical shift from a unipolar world order to a multipolar one (more on that below). Many countries in the Asia Pacific region, for instance, will become more likely to prioritize China’s agenda over that of the United States, with implications for U.S. access to commodities now sourced from Asia.
Given these pressures, inflation is unlikely to slow anytime soon. This poses a huge challenge for central banks and their favored tool for controlling prices: interest rates. Higher borrowing costs will have limited power now we have entered an era of secular inflation, with supply/demand imbalances resulting from the unraveling of globalization.
Source : cointelegraph.com/news/5-reasons-2023-will-be-a-tough-year-for-global-markets by Cointelegraph By Joseph Bradley - November 12, 2022