This year should see a change in market dynamics as interest rate hikes slow and rates peak. Previous interest rate increases should start to gain traction in containing inflation. The hope is that the central bank will manage to achieve a soft landing for the economy. Even if we enter recession, markets tend to focus on the outlook and may well look to the recovery. So, could the worst be over for markets?
CNN reported last week that most analysts seem to expect that inflation risks will subside this year, leading the US economy into a light recession and eventual recovery. (Before the Bell, 28th December)
If that was the good news, this is the bad news – CNN reported this week that geopolitics is the biggest risk as inflation fades. They draw on a report from the Eurasia Group which examines the political risks that are most likely to play out over the course of 2023. There is some encouragement in the report, but it is clear that geopolitical risks remain and have likely intensified. The war in Ukraine has become increasing entrenched. Russia has been on the backfoot, but is unlikely to back-down, while Ukrainians will only accept a full Russian withdrawal. In this environment, Russia will intensify its efforts to destabilize the United States and Europe. The Eurasia Group have identified that new technologies will be a gift to regimes bent on stifling dissent at home and undermining democracy abroad.
Inflation still features as one of Eurasia Group’s top political risks for 2023, but behind Russia’s entrenched position in Ukraine, Xi’s consolidation of power in China, and disruptive technologies that erode social trust and undermine democracy.
Closer to home, China’s reopening brings both opportunities and risks. CNN has reported that expectations are high for the world’s second-largest economy. However, the process of reopening is likely to be erratic, as the administration pivots away from it strict zero-Covid policy amidst deepening domestic challenges.
It all points to the difficulty knowing what lies ahead.
Eurasia Group’s Top Risks for 2023 is available at: Eurasia Group | The Top Risks of 2023