Geopolitics will drive dynamics in world economies Geopolitics will drive dynamics in world economies\images\insights\article\earth-europe-small.jpg December 13 2022 December 13 2022

Geopolitics will drive dynamics in world economies

Three things to watch in 2023.

Published December 13 2022
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Easing commodity prices Commodity prices soared over much of the past year, triggered by the war in Ukraine (the disruptor driving all three of our “Three things to watch”) and contributing to a worsening inflation outlook globally. Energy prices in particular skyrocketed, especially in Europe, as the West imposed sanctions and Russia weaponized the commodity, cutting off and curtailing supplies to the continent, its largest customer. But the resulting erosion in real incomes and aggressive monetary tightening by central banks means a pronounced slowdown in global growth is in the cards for 2023. Indeed, the worst cost-of-living crisis since the 1970s in Western Europe seems likely to lead to a recession as the calendar turns. This, in turn, should help continue to hold down commodity costs that already have moved well off their summer peaks.

De-globalization It seems likely that the current geopolitical trends eventually will weigh on prospects for continuing globalization, the main source of productivity gains globally over the last three decades. Policymaking almost certainly will be driven as much by national security considerations as economic rationales, with the double shock of Covid and war in Ukraine putting supply-chain resilience, energy and food security front and center. Expect more supply-chain duplication, onshoring and friend-shoring. This shift not only should be gradual and opportunistic but also inflationary as it implies higher costs and reduced efficiency. 

More “go” for going green A greater push for energy security arising out of the conflict in Ukraine strengthens the case for the green transition. To be sure, in the short run, the energy crisis may drag on as the need to secure energy supplies outweighs carbon intensity considerations. Over the long run, however, the development and scaling of renewable sources arguably offers the most promising solution to achieve secure and cheaper energy, especially for net importers of fossil fuels.

Tags 2023 Outlook . International/Global . Geopolitics . Markets/Economy .

Views are as of the date above and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security or sector.

Federated Hermes Investment Management Limited