In my last review of current risks, I identified a number of risks and hypothesized that inflation would tick along until attitudes towards COVID change. I think that attitudes to COVID are changing, albeit at different rates around the world, which infers that workforce efficiency could improve.
Although notably, China is maintaining it’s Zero Covid policy, which means that workforce efficiency will remain low for trades relating to China.Addendum
Another contributing factor to this will be higher global OCR rates that will increase people’s dependence on their employment. Coupled with the fact that rates have been increased at such a fast rate that it’ll be difficult to see the effect of the volume of change, it’s entirely possible that the rate changes alone will push the world into recession early-mid 2023. All these factors will likely kill off the high demand for labour and quash wage inflation.
We also have Putin who will likely be becoming more desperate as despots who lose wars usually lose their power (excuse the pun). I feel that he will be unlikely to use nuclear weapons because everyone fairly unanimously views using nukes as bad for people who choose to live on Earth. While this won’t deter Putin personally, even his allies would struggle to defend his actions, which would give NATO the freedom to turn the full power of their technologically superior arsenal directly on Russia to set them back to the stone age and remove any possibility of future threat.
In summary, I predict that 2023 is lining up for:
- Wage deflation.
- Continued high inflation for energy due to a continued stalemate between Russia and civilized society.
Medium-to-low* Medium-to-high inflation for necessary goods that depend on energy / logistics (food), though these will feel expensive because of the wage deflation. Low* Medium inflation for luxury goods due to increased costs because of energy/logistics, but tempered by the lack of demand from the recession.
- There are many countries with unconventional economic policies from unconventional leaders, such as England, Turkey, etc. Who have lead their country into a dire economic situation. I don’t know how this will affect the balance of global trade when it settles, but there could be some industries that are no longer viable in particular countries and other industries that are new to those countries due to currency values changing – this will lead to inefficiency, paucity and lower wages.
- Property will likely continue to fall as recession hits demand, OCR reduces affordability and population growth remains lackluster.
* Revisions made due to the above addendum relating to China’s Covid issues.
It’s hard to know where best to put the money to preserve it in line with inflation, never mind investing for growth. That said, my personal financial strategy remains to cover my risk of exposure to debt by reducing liquid holdings and claw back what I can of my illiquid holdings.