Recession, pipeline sabotage, clean energy: the world in 2023

The editors of Collins English Dictionary have chosen “permacrisis” as their word of the year 2022. Defined as “a prolonged period of instability and insecurity”, the term is a horrible portmanteau that precisely defines the current world on the threshold of 2023. Vladimir Putin’s Russian invasion of Ukraine has led to Europe’s largest ground war since 1945, the most serious nuclear risk of escalation since the Cuban Missile Crisis and the most comprehensive sanctions regime since the 1930s.

Soaring energy and food costs are fueling the highest inflation rates in many countries since the 1980s and are the biggest macroeconomic challenge of the modern era facing central banks. Certainties that seemed certain decades ago – borders must be inviolable, nuclear weapons will not be used, inflation will be low, and the lights will stay on in the rich world – have abruptly faltered. Three shocks overlapped to cause this upheaval.

1. Geopolitical shock

The biggest shock is of a geopolitical nature. The post-war US-led world order is being challenged, most blatantly by Vladimir Putin, and most profoundly by the continuing deterioration of relations between Washington and Xi’s China. Jinping. The determination with which Europe and the United States reacted to Russian aggression undoubtedly revitalized the idea of ​​the West, and more particularly that of an Atlantic alliance. But it has widened the gap between the West and the rest of the world.

The majority of people on the planet live in countries that do not approve of Western sanctions against Russia. Xi Jinping openly rejects the universal values ​​on which the Western order is based. The economic decoupling between the two largest economies in the world is gradually becoming a reality; a Chinese invasion of Taiwan is no longer unthinkable. Cracks are also emerging in taken-for-granted geopolitical certainties, such as the convenience alliance between the United States and Saudi Arabia.

2. Energy Shock

The war in Ukraine has, in turn, caused the biggest commodity shock since the 1970s and an accelerated reorganization of the global energy system. Ukraine’s importance as an exporter of agricultural products posed a risk of mass global starvation until an agreement was reached to reopen the port of Odessa.

But even today, for many countries, the most immediate consequence of this distant conflict is the increase in food and fertilizer prices. Vladimir Putin’s drive to instrumentalize his gas exports has exposed Europe’s chronic dependence on Russian hydrocarbons, rendered swaths of its energy-intensive industry unviable overnight, forced governments to shell out billions of euros to protect their consumers and sparked a mad rush to find new sources of energy supply.

And all this during a year in which the consequences of climate change, from the floods in Pakistan to the European heat waves, have appeared in all their violence. With soaring energy prices pushing even the greenest European politicians to reactivate previously mothballed coal-fired power stations, tough trade-offs had to be made to ensure the energy supply remained affordable, safe and environmentally sustainable.

Read alsoGermany: Lusatia learns to break away from its coal

3. Economic shock

Rising energy prices have, in turn, exacerbated the third shock: the loss of macroeconomic stability. Consumer prices had already started to rise in early 2022 as demand spurred by stimulus came up against post-pandemic supply bottlenecks. But as food and energy prices skyrocketed, what had previously seemed temporarily high inflation turned into a lingering double-digit problem.

Led by the Federal Reserve, all central banks embarked on the fastest and strongest hike in interest rates in at least four decades. Yet, as 2022 draws to a close, macroeconomic stability remains a distant prospect: global inflation is still close to double digits and it’s hard not to draw parallels with the situation in the 1970s.

What will happen in 2023

Everything will depend on how these three tremors will evolve, and what repercussions they will have on each other. In the short term, the answer is not reassuring. Most of the world will be in recession in 2023, and in several regions economic anemia is likely to exacerbate geopolitical risks. This poisonous mix will be most evident in countries in Europe where many economies are already on the brink of recession. So far governments have shielded their consumers from the worst effects of the energy shock through massive subsidies and price caps. This cannot last indefinitely.

Read alsoIreland champion of economic resilience will escape recession in 2023

The biggest geopolitical risk is that Vladimir Putin, unable to prevail on the battlefield, wants to weigh even more heavily on these European vulnerabilities. This strategy is already evident in Ukraine itself, where Russia is stepping up efforts to wipe out the country’s energy infrastructure as winter approaches. Until now, attempts by the master of the Kremlin to break Western Europe’s solidarity with Ukraine by exploiting its gas supplies have failed. But it could go much further, completely halting (rather than curtailing) gas exports or directly sabotaging European pipelines. Such an escalation would arouse less international condemnation than the use of tactical nuclear weapons. But it would worsen the situation in Europe.

China will be the second place where economic weakness could aggravate geopolitical risks. Its economy enters 2023 weakened by a series of mistakes, including Xi Jinping’s stubbornness to pursue his zero Covid policy and his inability to manage a vast and festering real estate crisis.

At the same time the Chinese president has accentuated his aggressive and nationalistic rhetoric, in particular about Taiwan. Putting loyalty before competence, he no longer has any experienced economic technocrats around him. If China’s economic woes worsen in 2023, Xi may be tempted to take a belligerent stance on Taiwan to distract from his opinion.

Relatively good American health

The US economy enters 2023 in a much stronger position than China or any European country. Aggressive rate hikes by the Federal Reserve will tip the economy into a recession, which will however remain moderate due to a still strong labor market and abundant household savings. Although high oil prices have pushed up inflation and hurt the Biden administration, the country remains a major energy producer and has therefore benefited from the shocks to commodities this year. .

In 2023, paradoxically, the relative good economic health of the United States could be a more worrying problem for the rest of the world than its weakness. The Fed will have to keep raising rates to curb inflation, which will further strengthen the dollar and force other banks to fall in line. Domestically, the danger would be that a divided government and even a modest crisis could lead to legislative paralysis and even more poisonous political confrontations than usual in Washington. In this context, support for Ukraine could erode in favor of a tougher stance on Taiwan. The first element would encourage Putin, the second would infuriate Xi.

However, there is some good news. Some countries will prosper. Gulf economies are booming, for example, taking advantage of high energy prices and their growing role as financial warehouses. India will prosper thanks to deliveries of Russian gas at discount prices, increased domestic investment and growing interest from investors seeking to detach their supply chains from China.

Monetary intransigence

The upheaval will lead to the questioning of a certain orthodoxy. As inflation is gradually and painstakingly brought under control, central bankers will wonder how far they should continue their intransigence. Few of them should be able to come close to their 2% inflation target, and a heated debate will ensue over whether this is really the right target to pursue.

Read alsoWhy the Fed’s 2% inflation target is no longer necessarily the most appropriate

At the same time, the energy shock will boost the shift to renewables: Fatih Birol, who heads the International Energy Agency, called the shock a “turning point in energy history” that will “accelerate the transition towards clean energy”. The crisis will force the adoption of a greater realism vis-à-vis the role of fossil fuels, and in particular that of natural gas as a transition fuel towards a greener future. Hopefully, old hypocrisies – such as Europe’s reluctance to fund gas projects in poor countries even as it struggles to find new gas supplies for itself – should finally be able to be denounced, and we would see the birth of a greener, more diversified and more secure global energy system.

The long-term geopolitical consequences of the 2022 shocks are the most difficult to predict. Whatever happens in Ukraine, it is obvious that Vladimir Putin will fail in his strategic plan to deny this country the right to exist. On the contrary, Ukraine will become a country turned towards the West, endowed with the largest and most experienced of European armies.

Even if Kyiv stays out of NATO, it will transform Europe’s security situation. And Ukraine’s victory should give food for thought to other potential aggressors. Yet the refusal of most emerging economies to subscribe to Western sanctions against Russia indicates that the motivation to defend democratic freedoms and the right to self-determination remains limited. The post-war order may not be dead, but it has been profoundly transformed.

By Zanny Minton Beddoes, Editor-in-Chief of The Economist