I used to read Byron Wien’s 10 surprises every year. Then I started producing something similar as a CRO, but with a risk focus. What are the things we know will happen, but are complacent about? What are the events that have been prepared for, but may happen in an unexpected way? And what are the things that come from the left field?
Inflation
I think we will see many 2023 prediction lists begin with the premise that inflation expectations in the market are too low. I’m not sure. Think about how an economist’s predicts growth. The things that cause the, often surprising, variance in growth aren’t all in the economic models used to predict that growth. My view is that the same is true of inflation. The predictions will be wrong by some causes we don’t know of or don’t account for. Thus inflation feels a bit more like the sum of surprises in 2023 than the first prediction of the year.
The forward curves may well be under-predicting the average measured inflation. But I think the trend will be more varied across countries than markets expect; and more varied inside sectors and groups of people inside those countries.
But inflation itself will cause a debate on what inflation is and how we measure it. There will be more noise about what official inflation measures actually measure by the end of the year. For there could be a reduction in the official rate for most countries, but a clear feeling of impoverishment for many people. It's the new GDP problem (GDP growth in recent times did not lead to a clear growth in many peoples feeling of standards of living).
Low Growth
Stagflation is a definite possibility for some countries this year. Low growth an almost given in the major economies. Which ones to look out for? Who will suffer most? The top of most economists lists for an underperforming economy is the UK. It is clear they are right; relative to others the UK is in a bad place. Productivity is unlikely to recover unless there are structural changes, and these look un-achievable by the current government. Thus the fiscal position will continue to worsen, and there isn’t any realistic offsets. Having said that, remember this is also the consensus view. My guess is that the economy may slightly outperform expectations, but structural problems may lead to social turmoil. As time passes the average British voter will go to Europe on a package holiday and find that they are poorer than the countries they visit. As the realisation hits of the increasing relative poverty of the UK, it seems unlikely a thoughtful debate will begin on how to reduce this. More likely we will see nationalistic politics and a continued relative decline. If the decline increases in velocity then an Argentina-like end-point is possible. But unlikely. And definitely not this year. Fingers crossed for the UK.
The surprising places we could see a relative underperformance are possibly Germany, Italy and maybe Australia. Italy may suffer under its problematical politics combined with a more hawkish than expected ECB, not supporting Italian government bonds. Germany also can easily underperform consensus via complacency. Australia similar.
The US is an interesting one. There is the possibility of a mild recession turning nastier, but I think the start of the presidential political cycle will leave the US doing less to damage itself in the coming year. The US in the longer term must mediate how its politics and people adapt to no longer being the foremost power in the world. The transition will be very bumpy at the minimum.
Wars
I don’t see a neat end to the Ukrainian war next year. Best case is a Korea situation, where fighting dies down but only tacit ceasefires exist. Prior to this it is likely there will be successes for the Ukrainian military, but also some reverses. Overall I see an increased realisation of attritional losses on the Russian side causing a de facto ceasefire, but not until the beginning of winter 2023.
No invasion of Taiwan, but I’m no expert on this. Pressure yes, but no invasion this year or the next. And maybe never. But China will continue to increase pressure on the rest of Asia through the building of bases and territorial claims, with other nations complaining a bit but failing to do anything to halt it.
The other area I think is very important, but often forgotten, is the Sahel; not a country but a set of countries. All with growing populations, social issues, a lack of resources and few opportunities. Significant migration to Europe will continue. For my guess is that the migration seen so far is just the first wave. These migrations will cause many issues in Europe, in UK and in their near neighbours, Turkey and North Africa. There will be many positives from this migration, but these will not be seen as important by the populace of the countries being migrated to.
Science
Science and discovery in all its forms is a source of growth and productivity. And growth does not have to mean the building of blast furnaces, as most politicians seem to believe. In rough order of likelihood some views on science areas important in the coming year:
First increasing digitalisation. This is an ‘of course’ statement. I would only like to remind everyone that the ubiquity of increasing interdependence in IT means that cybercrime and cyber risks are now the largest risk that can be mitigated by sensible actions out there. Thus spend money on cyber resilience, and preparedness. Spend money on new information technology, and use computing power. Integrate IT into the fabric of your organisations. Think of it like you think of people, and the IT department like you think of the HR department. But be ready for a data breach. Make sure the C-suite understand enough for the response to be adequate and quick.
On climate change, prepare for a depressing year. Surprising heat waves with bad environmental effects, floods, storms, fires and insurance industry alarm. Increasing climate activism in both good and bad ways. I think science can do a lot here, but it will seem for the next few years that the world is walking towards its doom. It might be so, and there will be horrible outcomes from the continued warming of the planet, but in the longer term I am hopeful. This is an are we must all work together on relentlessly.
AI is important. To be slightly more precise, Machine Learning in all its forms will be the method of choice for analysis and decision-making. But humans aren’t unnecessary yet. I’m not predicting the singularity (a fully AI, with states of consciousness, machine) this coming year or two. Important for sure though, and very useful.
An area to not forget about is Quantum Computing. Real progress will be made here. Not so much so that bitcoin gets hacked, but enough to resurface this as a risk in all cryptography and its uses. I think Quantum Computing will become an opportunity for the majority, from a sideline. An interesting area.
Time to put money on Fusion. A critical area.
Natural disasters
I’m not about to predict natural disasters. That there will be some, seems likely. Whether they are big or small may depend on your viewpoint, and how affected you are by any particular one. But companies have to be ready, whether that's earthquake preparation or flood preparation or similar.
Digital world
I feel like I’ll be repeating myself here. Here I don’t mean the meta world – for now I think these types of immersive social media are not the immediate future – but the digitisation of commerce; and this will continue apace.
Apologies for those who have heard this before but here is a story that gives my view on these technologies. When I was young (8?, 1974?) I bought myself a book about lasers. The book was clear that the research was mainly to use lasers for blasting stuff, and working out how to make more powerful ones to blast more. They were a ‘solution looking for a problem'. Today they are ubiquitous in many applications, using many laser types. They are still used for blasting (and cutting) stuff, but I doubt that is how the majority of us interact with lasers today. The digital and IT worlds of today have this property too. The things they will change most are likely at the periphery of theirs uses today.
The World of Finance
Maybe a bank will fail or need rescuing this year. A banking mini-crisis can’t be ruled out. Recessionary conditions, asset price falls, poor loans, overhang from COVID packages, reduction in trading and investment banking revenues – conditions aren’t great. At the minimum there will have to be continued consolidation in the industry. Europe will be especially hard hit or changed here. Large regionals are likely to scale back and focus on defence of their core regional businesses. It feels that banking isn’t going to be helping economies ride out the coming recessions; their counter-cyclicality will become a focus again of regulators. For banks then I think it’ll be best to get in front of the wave. Scale back, pick the core revenue sources, exit dumb stuff, spend on IT, become more digital. Easy to say. Hard to do.
I hope the above triggers thoughts in how you manage your businesses and help you prosper in this coming year. I’m always happy to have debates and take on differing viewpoints. It is more likely I am mostly wrong than mainly right. And new evidence must always be examined unbiasedly.
Fingers crossed for 2023.
Lewis O’Donald
Arboreal Risk Advisors
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