2022 was a turning point. That’s hardly an overstatement. The Russian invasion of Ukraine has started the biggest land war in Europe since WWII, triggering a massive post-invasion commodity shock and resulting inflation in many countries. As well as the brave fight of the Ukrainian people and the remarkable resilience of liberal western democracies, both surprising for Mr. Putin. Also, after 2 years of covid, China finally gave in and lifted its unique zero-tolerance policy – almost overnight. The consequences are not yet fully clear,, but could be far-reaching. The same holds true for the worsening relationship between America and Xi Jinping’s China. Furthermore, the impact of climate change became even more visible with heatwaves, wildfires, and droughts in many parts of the world.

Starting situation at the end of 2022

The year 2022 has ended a period of relative stability and security. As 2023 dawns, the global economy is in full crisis. Soaring food and energy costs have fueled the highest rates of inflation since the 1980s in many countries and created a major macroeconomic challenge for central banks. Many experts believe that a recession is inevitable. And many convictions of the last decades, for instance, that nuclear weapons will not be used, inflation will be low and foreign borders will be respected, have been shaken profoundly. 

The Russian attack on Ukraine has led to both the biggest commodity shock since the 1970s and a fast-tracked reshaping of the global energy system. Ukraine’s importance as an agricultural exporter meant the war threatened mass global hunger, until a means was found to open the port of Odessa. Even now, for many countries the most immediate consequence of a far-off conflict has been food and fertilizer at home. Mr Putin’s willingness to weaponise his gas exports exposed Europe’s chronic dependence on Russian hydrocarbons, rendered swathes of its energy-intensive industry unviable overnight, forced governments to spend billions cushioning consumers and prompted a mad scramble for new sources of supply. And increasing energy prices have driven inflation from “temporarily elevated” to a double-digit problem.

Business outlook 2023+

To quote Niels Bohr, predictions are very difficult, especially about the future. That’s true even for the business outlook for 2023 and beyond, which depends greatly on how the geopolitical and energy shocks will evolve in the short and long run: 

In the short run, the outlook is grim. Many countries will be in recession in 2023, and in several places economic weakness could intensify geopolitical risks. This notorious combination will be most evident in Europe, which is facing difficult winters in 2022-23 and 2023-24. Many European economies are already on the edge of recession. The higher interest rates needed to dampen inflation will further reduce consumer spending and increase unemployment. Until now (December 2022), European governments have protected consumers from the worst of the energy-price shock with subsidies and price caps; it is obvious that this will not stand forever. Pressures for fiscal tightening will increase, especially, but not only in the UK. And there is further risk for Russia, unable to succeed on the battlefield, hurting energy supply on the continent even further. This is what Russia has been doing in Ukraine and in the Baltic sea, and could go much further – for example, by cutting off all gas exports or by sabotaging Europe’s own gas pipelines. Then things would get a lot worse in Europe (even without the use of tactical nuclear weapons by Russia). 

Adding China to the mix doesn’t improve the outlook. Covid-19 is raging after the sudden fall of the zero-covid strategy, there is the property crisis of unclear proportions, while the Chinese government is increasing its saber-rattling over Taiwan.

In the long run, the world could face a situation similar to the aftermath of the oil shocks in the early 1970s, which led to stagnant economic growth in many countries as oil prices surged, coining the notorious term “stagflation”. Although there are differences between now and then, some features of the two crises resonate: Energy crisis, a negative supply shock, the return of inflation, geopolitical tensions, as well as resource competition. Not the only possible outcome, but possible. Among the reasons to be slightly more optimistic about the future is the fact that there are clean-energy alternatives which are becoming economically feasible as prices for fossil fuels spike.  

Silver linings

In a nutshell, there are plenty of reasons why 2023 will be a grim and potentially dangerous year. However, there is some good news amidst today’s tumult. The first silver lining lies in the resilience of liberal western democracies and the brave fight of the Ukrainian people. For Vladimir Putin in early 2022, resistance against the Russian attack war was neither worthwhile nor expected. And decadent western liberal democracies, recently defeated and humiliated in Afghanistan, would surely fail to match condemnation of Russia with real backing for Ukraine. He might have misjudged. 

The second silver lining lies in the price changes the energy shock has created in fossil fuels, allowing a shift to renewables. If we use the opportunity, the energy crisis can fast-track the clean-energy transition, because at soaring prices for fossil fuels, clean alternatives suddenly become economically feasible. At the same time, the crisis may drive  greater realism about the intermediate role of fossil fuels, especially the role of natural gas as a bridge fuel to a greener future. The result could be a global energy system that is greener and more secure.