Source: Irving Wladawsky-Berger, CogWorld Think Tank member

A few weeks ago, The Economist published “The World Ahead 2023”, its 37th annual year-end issue that examines the trends and events that will likely shape the coming year. Two years ago, “The World in 2021” said that we should expect unusual uncertainty in the coming year, given the interactions between the still flourishing covid-19 pandemic, an uneven economic recovery and fractious geopolitics. Last year, “The World Ahead 2022” said that 2022 would be a year of adjusting to new realities in areas like work and travel being reshaped by the pandemic, and as deeper trends like the rise of China and accelerating climate change reasserted themselves.

“After two years in which the pandemic was the force shaping the immediate future, the main driver now is the war in Ukraine,” said Tom Sandage, editor of the annual World Ahead annual issues. “In the coming months the world will have to grapple with unpredictability around the conflict’s impact on geopolitics and security; the struggle to control inflation; chaos in energy markets; and China’s uncertain post-pandemic path. To complicate matters further, all these things are tightly coupled, like an interlocking series of gear wheels.”

Here are the top ten major trends for 2023:

1. All eyes on Ukraine - “Energy prices, inflation, interest rates, economic growth, food shortages - all depend on how the conflict plays out in the coming months.”

2. Recessions loom - “Major economies will go into recession as central banks raise interest rates to stifle inflation, an after-effect of the pandemic since inflamed by high energy prices.”

3. Climate silver lining - “[T]he war will accelerate the switch to renewables as a safer alternative to hydrocarbons supplied by autocrats.”

4. Peak China? - “With China’s population in decline, and its economy facing headwinds, expect much discussion of whether China has peaked.”

5. Divided America - “[S]ocial and cultural divides on abortion, guns and other hot-button issues continue to widen.”

6. Flashpoints to watch - “The intense focus on the war in Ukraine heightens the risk of conflict elsewhere.”

7. Shifting alliances - “Amid geopolitical shifts, alliances are responding. NATO, revitalised by the war in Ukraine, will welcome two new members. Will Saudi Arabia join the Abraham accords?”

8. Revenge tourism - “As travellers engage in post-lockdown ‘revenge’ tourism, traveller spending will almost regain its 2019 level.”

9. Metaverse reality check - “Will the idea of working and playing in virtual worlds catch on beyond video games?”

10. New year, new jargon - “Never heard of a passkey? … nimbys are out and yimbys are in; cryptocurrencies are uncool and post-quantum cryptography is hot; but can you define a frozen conflict, or synfuel?”

Let me discuss three of these trends.

A new global energy system is emerging

“In 2022 an energy shock caused chaos in Europe and much of the world, fuelling inflation and making a recession more likely,” wrote The Economist. “By September 2022 a third of the rich-world inflation rate of 9% was attributable to energy. President Vladimir Putin’s strangling of gas supplies to Europe forced firms and consumers to cut consumption by 10% year on year and sparked fears of deindustrialisation. … As countries rush to secure their energy supplies, they are turning back to dirty fossil fuels.”

The article adds that there’s a silver lining to these energy shocks. The 1973 Arab-Israeli War led to a major oil crisis when a number of Middle East oil-producing countries ceased oil exports for five months to the US and other countries that supported Israel in the conflict. The oil embargo led to long lines at gas stations, increased oil prices by 300%, ended the post WWII period of prosperity in the West, and raised a number of threats to global energy security.

But, the 1973 oil crisis also triggered a search for energy independence in the West, leading to major investments in new supplies of energy around the world, as well as in alternatives like nuclear. Since 1977, crude oil and natural gas production have increased by 32% and 81% respectively in the US.

The 2022 energy shock is now expected to accelerate the switch to renewable sources of energy. “In 2023 the world will still be grappling with unstable oil and gas markets, but will also redouble its efforts to create an energy system that is cheaper, cleaner and more secure,” predicts The Economist.

“Renewables 2022”, a recent report by the International Energy Agency confirms this prediction. “The global energy crisis has triggered unprecedented momentum behind renewables, with the world set to add as much renewable power in the next 5 years as it did in the past 20,” said the report. “Global solar PV [photovoltaic technology] capacity is set to almost triple over the 2022-2027 period, surpassing coal and becoming the largest source of power capacity in the world. … Global wind capacity almost doubles in the forecast period, with offshore projects accounting for one-fifth of the growth. Together, wind and solar will account for over 90% of the renewable power capacity that is added over the next five years.”

Companies will face a toxic mix of high costs and low demand

“Simmering geopolitics, outright war, a global pandemic: anyone who has led a business through the ups and downs of the 2020s so far probably feels like they’ve seen it all,” wrote The Economist. “Now they must prepare to battle another foe — the two-headed monster of high inflation and economic stagnation.”

The past few years have been truly chaotic. From supply chains to hybrid workplaces, it’s been very difficult to predict what the business environment will be like in the post-pandemic new normal. The one major area of agreement is that the pandemic has accelerated the digital transformations that companies were forced to make to help them cope with the crisis. “Welcome to the future — not 2021, as you might have been expecting, but 2025, or even 2030, depending on whom you ask,” wrote The Economist two years ago in “The World in 2021”.

In addition, after years of low inflation, companies now have to deal with fast rising interest rates and high inflation. Despite higher costs, consumer demand has remained strong. “That helped American businesses’ profits, as a share of GDP, reach a record high during the year.”

In 2023, wages and other costs are expected to remain at high level. And continuing inflation and high interest rates may lead to faltering consumer demand and start taking a toll on the economy. “No wonder, then, that 39% of chief financial officers surveyed by Deloitte, a consulting firm, in August 2022 said they expected America to be in a period of stagflation in 2023, and 46% expect a recession.”

“As with the other challenges that have been faced in recent years, some companies will emerge in better shape than others. Bosses who preside over spiraling costs and collapsing market share will be booted out by unhappy investors. But those who emerge victorious from this latest corporate struggle will find their reputations enhanced.”

Has China reached the peak of its power?

In 2000, China’s GDP was $1.2 trillion while US GDP was a bit over $10 trillion. But by 2021, China’s GDP had soared to $17.7 trillion compared with America’s $23 trillion. “On the current trajectory, it will overtake the U.S. within a decade,” said “The Great Economic Rivalry: China vs the U.”, a recent paper by the Harvard Kennedy School. “By the yardstick both the CIA and the IMF judge to be the best metric for comparing national economies — purchasing power parity [a measure that takes into account the purchasing power of goods and services in each countries’ currency] — China has already surpassed the U.S. to become the world’s largest economy.”

“However, a host of difficulties besetting the Asian giant, some of which are self-inflicted, will delay the day it overtakes America,” wrote The Economist in a recent article. “A growing number of economists now think that day may never arrive.”

China’s self-inflicted difficulties include its draconian zero-covid policy which responded to every outbreak with severe lockdowns that choked the economy and is now being loosened. The property market is in crisis.  A more state-controlled socialist economy has been imposing its views on how businesses should be run. And aggressive regulations have dimmed innovation and private-sector dynamism in the previously thriving technology sector. “China’s economy expanded by an impressive 8.1% in 2021, but it will be lucky to grow by even 3% this year.”

Longer term, demographics are also working against China, largely based on the one-child policy in effect between 1980 and 2015. “In 2023 China’s population, currently about 1.4bn, will probably start to shrink, and India will surpass it as the world’s most populous country. For years the share of old people in China has been rising, while the workforce contracts. That, too, has cut into economic growth and put a huge burden on the young.”

“In retrospect, the pandemic marked the end of a period of relative stability and predictability in geopolitics and economics,” wrote World Ahead editor Tom Sandage in conclusion. Today’s world is much more unstable, convulsed by the vicissitudes of great-power rivalry, the aftershocks of the pandemic, economic upheaval, extreme weather, and rapid social and technological change. Unpredictability is the new normal. There is no getting away from it.”

Irving Wladawsky-Berger is a Research Affiliate at MIT's Sloan School of Management and at Cybersecurity at MIT Sloan (CAMS) and Fellow of the Initiative on the Digital Economy, of MIT Connection Science, and of the Stanford Digital Economy Lab.