Indian Merchant’s Chamber (IMC) [opens pdf]

The last few years have conclusively shown that real outcomes are a lot more interesting than what even the most egregious forecasts can imagine.

Almost no forecast saw the coming of a pandemic, insurrection in a large democracy, a war and its mobilization, or the possibilities of nuclear attacks. Export curbs, trade disputes, and embargo on technological transfers between the largest economies of the world are unprecedented in a world that owes a large share of the prosperity to open trade and capital flows. Over the last decade and a half, central banks lived a world where their expanding balance sheets and zero interest rates could stoke no inflation – and now they simply are unable to put the genie back in.

What good can any forecasting be in a world where real events will almost surely overtake the imagination of the forecaster or the constraints of the current institutions. Still, it is in the nature of human endeavours to build a semblance of a forecast – it is a path around which thoughts can coalesce and decisions committed to.

In 2023, it will be useful to keep reassessing the forecasts as events play out. On most dimensions, what we can forecast are questions: the sheer possibilities in the answers are so many that picking what exactly can play out will inevitably end in a surprise.

Many ponderable questions

Conventional war or nuclear? Will there be a nuclear war? Once you begin to put the possibility of a life-destroying catastrophe on the table, most other questions fade in the background. If there is a ‘dirty bomb’, will it be contained? Will it unleash responses from other powers? If so, how many nations get into the act and with what intensity? Will some nations find this as a tempting time to test out their own nuclear capabilities? What, once triggered, will stop this chain reaction? Too many imponderables here. One can only hope that this thread is not opened in 2023 – or ever!

Climate surprises? Nature dealt out a rough hand earlier in 2022. The Indian subcontinent saw an intense heat wave that choked its wheat output. This was followed by floods in Pakistan of epic proportions. Whether it was the ice storm in Texas a few years ago or the severe intensity droughts in Europe and China last year, climate created awkward forecasting challenges. How much of the climate havoc can be contained in a year even with the most spirited of the Net Zero movements remains to be seen. Will newer, bigger challenges come through this year? Or can humans figure out a way to harness the change? In the short run, it may be fair to assume that nature will play out its hand while humans find a way to mitigate or adapt to nature’s impact.

Central bankers and debt: Even if humanity finds a breather from war and warming planet, economic conditions may come home to roost. To contain inflation, the textbook response has been to increase policy rates high enough to choke off growth. With low or no growth, the expectation is that eventually incomes would stall or fall, which could reduce demand, and hence the rapid rise in prices slows down. While this version of the narrative will possibly play out, one immediate corollary of the rising rates is the increasing cost of debt servicing. Post pandemic, many governments are laden with debt taken for safety-nets for their populations. As gross domestic products choke due to “planned recessions” and debt payment obligations rise, countries may be forced to make a choice on who to keep paying: its citizens or its creditors. Where a sustained rise in interest rates leaves many countries, especially if they must deal with the outcomes of war and warming planet, remains to be seen. Such economic contagions can create lost decades for countries.

Capital and trade disruptions? A constant over the last many decades of growth and spreading of prosperity was the increased flows of trade and capital. The last few years have seen the fracturing of the trade system (with tariffs and sanctions) and the flow of capital is now subject to geopolitical and national security concerns. In a world divided into blocs, such fracturing can create roadblocks for flow of goods and capital.

What could go right?

Not all is gloom and doom as we peer into CY2023.

Supply chains are beginning to fall in place after the large disruptions due to Covid and conflicts. The worries about semiconductor capacity and high freight rates are subsiding. India offers a unique geopolitical, economic, and strategic proposition to the western countries now considering diversifying their supply chains to make them more resilient. The sudden, sharp sanctions against Russia have created the need to diversify or “friend shore” production.

Energy flows continue to be shaped by gas disruptions but over the next year, capacity is expected to come onstream (liquefication, regassification, ships, etc.) Renewable energy projects such solar, onshore wind, offshore wind, energy storage, etc. are getting a boost from the high costs of fossil fuels. A significant portion of the large profits that have accrued to the petro-states and fossil fuel companies in 2022 can end up in the green industry, as these countries and companies seek a sustainable Net Zero future. With significant capital backing the green transition, expect to see some interesting technological breakthroughs in areas like battery or carbon storage, among others.

The current stance of central banks, especially the Fed of USA, suggests that they may be willing to live with a recession to slay inflation. There is a possibility, even as it grows smaller with every rate hike, that there is soft landing where inflation is contained (either due to the monetary policy moves or geopolitical negotiations on the war) and the growth does not significantly fall off. With nominal GDP rising due to inflation, the debt-to-GDP ratios will improve for countries; as interest rates moderate, the overall interest burden as a percentage of GDP also reduces. This could provide a boost to financial collaboration between the global North and South on mitigating climate change.

And yes, best of all, we may all survive 2023 without a nuclear, or climate, Armageddon!

The author is with the National Investment and Infrastructure Fund Limited. Views are personal.

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