Forecasting is a difficult art. Yet, in economy, it is one of the main centers of interest. But the exercise is a little distorted. An optimism excess may incite the economic agents to take decisions whose consequences would be heavy if the expectations are not fulfilled. To the opposite, good surprises quickly make forgotten the pessimistic statements and the credibility of their authors are not affected by that. 2022, as the two previous years, has known an unprecedent succession of events since the second world war having heavy economic repercussions. They were, due to their nature, impossible to predict as the sanitary crisis and the invasion of Ukraine by Russia.
The States have softened their consequences at the price of a high increase of their indebtedness. In a first step, that was painless because interest rates were negative or very close to zero thanks to central banks which were massively buying State bonds on the financial markets. But with the coming of inflation, resulting from the exceptional circumstances occurred these last years, that situation is over. Their mandates constrain them to act to bring prices increase back to a level near 2%. At the end of 2022, it was around 10%. So four factors threaten the world economy in 2023, the energy crisis, inflation and its consequences on growth and the political tensions generated by the war in Ukraine and the critical look at China.
Sanctions against Moscow have disrupted oil and natural gas flows and have caused brutal prices increases of these two energy sources. But the reorientations have been faster than it had been forecasted. Oil is easy to carry, it is what has made its success during the 20th century. India and China have got a large share of the exports Russia couldn’t deliver in Europe. In a context of abundance, to the point that OPEP has continuously renewed its agreements about the limitation of its production during the whole year, the probability of new tensions on this market is low and we wouldn’t know in 2023 another price rebound.
The situation is more complex regarding natural gas, which, to the difference with oil, is more difficult to transport. The closing of the pipelines connecting Europe and Russia has provoked a brutal shock because it did exist only few infrastructures available to supply these countries from other fields. The sea transportation of liquefied natural gas did not offer enough capacities and prices jumped. A reorientation of the flows did even occur thanks to American exports toward the Europe which contribute to offset a part of the deficit. But if the war made by Russia is continuing, the rigidity of the natural gas transportation techniques, at least toward Europe, would generate the keeping of high prices levels, even if due to the sweetness of the current weather, they have temporarily fallen.
This context has had heavier economic consequences in Europe due to the fall of the power production in France and to the European regulation which connects the electricity price to the natural gas one. It has constituted the main cause of the inflationist wave which has hurt the Old Continent. In 2023, the French nuclear power production will progressively come back to its usual level and contribute to reduce the tensions, but as soon as the European regulations have not been modified, power prices will remain high. But the shields put in place by the States in order to limit the consequences of that on household and to allow the enterprises to pursue their activity cannot forever last and that will affect activity.
So we will not notice in 2023 energy shortages but it is an illusion to hope that the prices for household as for enterprises will fall back to their 2019 level. So, the second threat is about inflation. Costs increases resulting from the past crisis have not been fully passed on the prices proposed to the clients. Tensions will remain. But as and when the supply chains will have recovered their efficiency, they will decrease. Inflation, as it is evaluated, is the ratio between the price levels of two successive years. There is a low probability that the increases which will occur in 2023 have the same extent than in 2022. So, mechanically, inflation in 2023 will be lower than in 2022.
The same reasoning must be applied to growth. Instead of envisaging a recession in 2023, excepted in countries affected by special circumstances like the United Kingdom with the consequences of the Brexit, it seems more appropriated to forecasting a period of consolidation or of transition before the coming back of an appeased international environment. Activity will know a very low rise or will even sometimes have a slight reduction but the scenario of a deep recession is not the most likely hypothesis. The addition of a reduction of the inflation during the year and of the prospect of a weak activity and sometimes of a light reduction would incite the central banks to soften their restrictive policies through a slowing of the interest rates increases. The States wouldn’t so have to suffer a new shock on their public finances provoked by the increase of the charges of the debt at a time when they reduce the exceptional aids they have had to consent to support their economies. The given signal would so be favorable to activity.
The last source of worry regards the geopolitical tensions. Whatever a solution is found in the conflict in Ukraine or not, the world in 2023, with all these crisis will not be the same. The globalization, centered on the United States and including China as the “factory of the world” we know for thirty years is an bygone model. Disruptions affecting the supply chains as the environmental requirements will incite the enterprises to come back to a production model closer to their clients. The States will try to re-industrialize their economies. China labor costs will make the country less attractive. The American policy consisting in showing China as a strategic rival will also contribute to the abandon of the former globalization model.
Sanctions decided by Washington against Moscow, the froze of the Russian assets in the foreign banks and the prohibition to use the dollar for some transactions will incite Beijing, as a preventive measure, to relaunch its strategy of the Yuan internationalization, in order not to risk, someday, to be confronted to this kind of threats. The trip in Saudi Arabia of the Chinese president and the agreement with the local authorities to pay the oil purchases in yuan goes in this direction. The relaunch of the Belt and Road investments program shows Beijing will to strengthen its economic partnerships with its neighbors in Asia, in the Middle-East and even in Africa. A “co-prosperity space” whose center would be in China, is arising. That constitutes obviously a threat for all the countries and the enterprises which would have not understood that and which would have not chosen to adapt themselves to it.
The world in 2023 will not be the same as the one we know for a quarter of a century. But that does not mean that a new serious crisis is certain this year. It only means that we have to prepare ourselves to that transformation.
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