The 2023 predictions that got away. As for 2024: geopolitical risks are here to stay; security will continue to trump the rest; tech innovation will go on expanding faster and faster; green will re-bound and the US election will be the most consequential event of the year.

  • WE TOO GOT SOME THINGS WRONG IN 2023, but we were in ‘good company’: most of the year’s economic projections were wrong footed by actual data. Two stand out. (1) Predicting the US recession that never came. Higher interest rates did not slow the economy down; and excess savings accumulated during the pandemic continued to fuel the US consumer’s irrepressible propensity to keep buying. (2) Anticipating that geopolitical turmoil would cause serious economic damage. This was not the case, proving the markets’ remarkable capacity to adapt and the resilience of the international economy.
  • INTEREST RATES. Are financial markets right to abandon the notion that interest rates will remain ‘higher for longer’? They may be overestimating the progress made on inflation and underestimating the future sources of inflationary pressure. Inflation is falling rapidly everywhere, but it remains above target and service inflation is too high for comfort. Meanwhile, the combination of (1) over-indebtedness (debt is not a free lunch), (2) increasing economic fragmentation, (3) rising populism (with calls for more income redistribution) and (4) myriad geopolitical and environmental risks will most likely entail higher inflation, and thus higher interest rates for some years to come.
  • THE TWIN CANAL CRISES, SUPPLY CHAINS AND INFLATION. To see the fourth point above playing out, look no further than Panama and Suez. The drought in one, and maritime attacks affecting the other, mean that half (by volume) of all container shipping linking Asia to North America is impacted. This results in long delays (more than 12 days to cross the Panama Canal, except for ships with costly reservations, while diversions around Africa taking 25% longer than using Suez Canal) and higher insurance costs which in turn lead to higher transportation costs and knock on price rises for consumer goods.
  • GEOECONOMIC FRAGMENTATION is the greatest threat to economic growth and global prosperity. Many analysts continue to underestimate its significance, pointing out that as a share of global GDP, global trade is not declining, and continues to remain stable (but it isn’t increasing, as it did during the hyper-globalisation years). True, but global trade figures measured in aggregate can mislead. A more granular IMF analysis shows that, over the past few years, trade within a politically aligned bloc of countries has grown 1.5 percentage points faster than trade across competing blocs. FDI segments in a similar fashion, much of it reconfiguring along geopolitical fault lines. This is the essence of deglobalisation: a world in which security considerations prevail over the rest. A headache for global businesses and investors increasingly forced to choose their bloc.
  • GEOPOLITICAL RISKS DISRUPTING THE GLOBAL ECONOMY? A quasi-certainty: geopolitical risks won’t abate in 2024. At best, they’ll throw sand in the wheels of the global economy. At worst, they’ll derail it. The most notable ones: (1) Russia’s war in Ukraine at a stalematefor the whole year with risks for Ukraine on the downside due to US and EU assistance unravelling; (2) Israel’s war against Hamas lasting many more months, running the risk of becoming a full-scale regional conflict; (3) China-US ‘cold war’ lasting many more years, harbouring the constant risk of erupting into some form of ‘hot war’; (4) More wars: the current tally of 183 ongoing conflicts worldwide is a 30 year all time high; (5) More military coups, notably in Sub-Saharan Africa where since 2021out of 18 attempts, 9 succeeded. All these play out on both physical and digital battlefields, meaning they have global reach and relevance.
  • COP28 – GLASS HALF-FULL OR HALF-EMPTY? Overall, an outcome strong on signals but weak on substance. On the plus side, the first climate conference in 28 years in which leaders kept to the science and agreed to transition away from fossil fuels. A clear signal for investors that oil, gas and coal are finished (even though, they’ll fight hard and will be around for years to come). On the minus side, “a litany of loopholes” (in the words in an analyst) and an avalanche of pledges (which come cheap). The most egregious absence from the final text: the words “fossil fuel phase out” were left out.
  • THE GREEN INVESTING OUTLOOK. Over -bullishness in renewables and the green economy is another bad call we made in 2023. Amazingly,clean energy, which added a record 500 gigawatts of global renewable energy capacity, was one of last year’s worst performers. In 2023, Blackrock’s Global Clean Energy ETF (the world’s largest of its kind) went down 20%, compared with a 20% rise for the MSCI World index. Positive momentum will inevitably come for the investment themes that support the greatest economic transformation of our time: from brown to green. In 2024, the world’s push for green and clean energy will be supported by: (1) A more benign macro-economic environment– interest rates have peaked, and cost inflation is sharply down (renewable’s capital costs are paid upfront); (2) Strong public and government policy support; (3) Exponential tech innovation (that also drives a reduction in costs).
  • TECH EXPANSION JUST KEEPS ACCELERATING. Last year, tech discoveries and their practical applications continued to progress at an exponential rate. Tech innovation is expanding so fast and in such a combinatorial manner that there is every reason to believe it will be the same in 2024. To prove the point, there were three big ‘surprises’ in 2023 that, a year ago to the day, didn’t even make it to the list of what to expect and yet, their positive economic impact is already being felt. (1) Generative AI which will start supporting productivity. (2) Solid-state batteries which will become a game-changer for the EV industry in 3-4 years from now. (3) Weight-loss drugs which will alleviate the obesity’s healthcare burden. Expect similar positive surprises in 2024.
  • TRUMP OR NOT? The US elections on 5th November will be the most consequential event of 2024, with truly global ramifications. Currently, prediction markets favour Donald Trump.
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