Global Trends

The war in Ukraine will grind on over the next year, sparking a global gas crunch and challenging the post-Cold War world order.

Annual

<p><strong>The progressive decline of the Western-led global order will hobble multilateral efforts to manage global crises like climate change in 2023 by further degrading global institutions and increasing diplomatic tensions between countries. </strong>Global powers like the United States, the European Union, Russia and China will increasingly seek to protect themselves from their rivals&rsquo; economic, security and political encroachment, leading all of them to circumvent previously accepted norms and reduce the importance of multilateral institutions like the World Trade Organization. The United States and the European Union will be closely aligned on a number of fronts, though bilateral tensions will emerge in 2023 as the U.S. Congress will likely fail to pass new global tax rules (which is a priority for Europe), and calls in Europe to impose digital service taxes on U.S. tech firms will intensify. In the meantime, the differing priorities of the West and the China-led developing world will undermine international climate negotiations and efforts by individual countries to combat rising global temperatures. This will see more Western governments adopt protectionist economic measures (like border tariffs) to support their own industries (like electric vehicles), ostensibly under their climate policies.<br />&nbsp;</p>

The World Moves On From the Western-Led Global Order

<p><strong>Russia&rsquo;s invasion of Ukraine will continue but neither side will achieve territorial gains sufficient to significantly degrade the other&#39;s negotiating position, ensuring continued Western sanctions on Russia and upward pressure on commodity prices. </strong>Both sides will attempt new offensives amid concern that the frontline will become increasingly stagnate with time. Ukrainian forces, aided by steady military support from Western allies, will concentrate their offensive southward toward the Sea of Azov to isolate Russian forces in the land corridor to Crimea. But Ukrainian attacks are unlikely to dislodge Russian forces from the corridor. Ukraine will also step up strikes on targets inside Russia in hopes of further eroding the war&rsquo;s popularity in Russia. Russia, for its part, will continue its campaign to destroy Ukraine&#39;s critical infrastructure, focusing on the country&rsquo;s electricity, water and communication lifelines. The infrastructural damage will result in a fall in living standards in Ukraine and refugee flows to the European Union, but will not significantly undermine support for Ukrainian President Volodymyr Zelensky or disrupt the Ukrainian military. Meanwhile, Russia will continue small-scale attacks in Donbas while preparing for a larger offensive to secure more of the Donbas still under Ukrainian control. Russian forces will continue to concentrate in Belarus and along Ukraine&rsquo;s northern and eastern borders, but Belarus will not join the war on Russia&rsquo;s side and Russia is unlikely to launch a new offensive from the country, as Moscow will instead focus on fortifying its foothold in southeastern Ukraine. The war&rsquo;s continuation means a cease-fire, let alone a peace deal, is unlikely in 2023. It also means Western sanctions on Russia will likely remain in full force and possibly be strengthened over the course of the next year.&nbsp;<br />&nbsp;</p>

A Cease-Fire in Ukraine Remains Elusive

<p><strong>Another year of war in Ukraine and the global natural gas crunch will drive Western governments to increase pressure on Kyiv to offer concessions to Moscow to establish a viable exit from the conflict, though such an exit is unlikely to materialize in 2023.</strong> Western governments will provide enough military and financial aid to Ukraine to continue defending itself from Russian offensives. With the war continuing, the European Union will be able to avoid significant natural gas shortages in the cold months of early 2023 due to high storage levels. But the bloc will need to increase its gas imports to avoid shortages during the 2023-24 winter. This will keep natural gas prices high, adding to global economic woes. The G-7 price cap on Russian oil will have a limited impact on global oil prices in early 2023 due to recession concerns. But if global economic conditions improve in the second half of the year, it could result in shortfalls in global oil supplies that push prices upward. Weak economic conditions will lead to more nationalist Western political figures (including Hungarian Prime Minister Victor Orban and members of the U.S. Republican Party) calling for a curtailment of support for Ukraine and, in Hungary&rsquo;s case, an easing of EU sanctions.<br />&nbsp;</p>

The Global Gas Crunch Tests Western Support for Kyiv

<p><strong>The European Commission will focus policy on shielding the bloc from the energy and cost of living crises, as well as increasing its autonomy in areas like technology and raw materials.</strong> Brussels will soften the rules on member states&rsquo; sovereign debt and fiscal deficit to focus on long-term debt reduction goals, and allow governments to maintain high levels of spending in the short term to cope with the economic downturn. Northern European governments will push to link the new goals to stricter penalties for countries missing them, and Southern European governments will push to exclude multiple spending areas (on issues such as the energy transition and defense) from deficit calculations. A compromise is likely because poor economic conditions will incentivize EU governments to allow room for continued high levels of public spending. The European Union will also keep disbursing billions of euros in grants and loans from the NextGenerationEU fund (which will provide some fiscal relief to member states), and adopt a more flexible approach to national governments providing subsidies and support for struggling companies. Separately, Brussels will move to increase its autonomy on issues such as critical raw materials and technology. The European Union will promote investment, research and strategic alliances with third countries on sectors including batteries, microchips and hydrogen, and promote additional investment, storage capacity and diversification of supplies (through alliances with countries including Chile, Mexico and Australia) for products such as lithium and rare earth elements. Against this backdrop, the European Union and its largest member states will continue to restrict Chinese companies&rsquo; access to the bloc&rsquo;s strategic economic sectors, including high-tech industries, and will also be willing to adopt protectionist measures to further shield critical areas of the EU economy.&nbsp;</p>

The EU Seeks to Increase Its Strategic Autonomy

<p><strong>China&rsquo;s economic growth will slowly recover as Beijing eases COVID-19 restrictions and offers modest economic support, but this growth will be constrained by ongoing regulatory scrutiny on the tech sector and efforts to deleverage the country&rsquo;s ailing real estate sector.</strong> Beijing will continue to ease its strict COVID-19 restrictions over the next year, allowing for a moderate recovery of domestic consumption. But an expected surge in new infections may temporarily depress growth and prompt authorities to revive some restrictions if death rates skyrocket. Such a return to strict lockdowns could reinvigorate nationwide protests, as could other economic triggers like mass layoffs in the tech sector or a string of bankruptcies in the real estate sector. But isolated local protests, which would minimally influence national COVID-19 policy, are more likely. The government will use supportive monetary policy in an attempt to revive consumption, but the impact may be limited as the real estate sector (which stores most Chinese household wealth) will likely remain deflated amid Beijing&rsquo;s deleveraging efforts, weighing on consumer confidence. Regulators will also expand oversight of data-heavy tech industries to bolster China&rsquo;s information sovereignty, guide capital into state innovation priorities and encourage corporate compliance with state initiatives (like Beijing&rsquo;s wealth gap remediation efforts). Though China&rsquo;s tech sector may recover some from its 2022 doldrums, its recovery will be limited as gig economy layoffs persist and regulation looms large.&nbsp;</p>

China’s Economic Recovery Resumes, but Remains Fragile 

<p><strong>China will wield military coercion along its periphery, but the risk of an invasion of Taiwan will remain low. In the meantime, Hong Kong&rsquo;s business environment will continue deteriorating as the National Security Law expands.</strong> The West will continue deepening diplomatic and defense ties with Taiwan, which will prompt Beijing to retaliate with military coercion, including increased overflights of Taiwan and (in a less likely case) more military drills around the island. But China&rsquo;s frail economy and unfinished military modernization will deter Beijing from pursuing a Taiwan invasion. Hong Kong will likely expand the Beijing-backed National Security Law (NSL) &mdash; a legislative priority that got delayed in 2022 due to COVID-19 &mdash; to include bans on activities such as sedition, treason, crowdfunding, and collusion with foreign forces and political groups, as well as cybersecurity or fake news violations. These additions could result in new scrutiny on foreign business relations and information flows, accelerating the diversification of business operations out of Hong Kong and into other Asian hubs (particularly Singapore), even as Hong Kong remains a regional financial hub. In a low-probability, high-risk scenario, moderate protests could arise in Hong Kong, especially if large-scale protests return to mainland China alongside an expansion of Hong Kong&rsquo;s NSL, which could trigger a security crackdown and new Western sanctions against Hong Kong authorities.</p>

China Expands Its Hong Kong Crackdown, While Avoiding a Taiwan Invasion

<p><strong>Insufficient cooperation with its allies will see the United States unilaterally impose more significant restrictions on China&rsquo;s tech sector as part of Washington&#39;s broader effort to counter Beijing&rsquo;s growing technological prowess. </strong>The Biden administration will attempt to get the European Union, Japan, South Korea and other global partners to impose export controls on key Chinese tech sectors. But U.S. allies&rsquo; concerns about their economic relationships with China will limit cooperation with the White House&rsquo;s aggressive push to cut off China&rsquo;s access to Western technology. The United States, Japan and the Netherlands will jointly implement restrictions on shipments of semiconductor manufacturing equipment to China, though Washington will probably also continue enacting such restrictions on its own (in addition to those that Tokyo and Amerstdam agree to implement). While the United States will continue to focus on China&rsquo;s chip sector, it will likely expand restrictions targeting China&rsquo;s artificial intelligence and quantum computing industries as well, widening the scope of technologies targeted. In addition, the United States will likely impose more limits on U.S. companies&#39; investments in China, including through a potential new mechanism that screens outbound investments that could have national security consequences. China, for its part, will assuage some U.S. concerns about transparency (such as over-auditing and who Chinese companies sell U.S. technology to). But this will only have a limited impact on the U.S. resolve in adding more restrictions.<br />&nbsp;</p>

More U.S. Restrictions on China’s Tech Sector

<p><strong>U.S.-Iran nuclear talks will likely collapse amid Iran&rsquo;s accelerating nuclear advancement and weapon transfers to Russia &mdash; triggering a new crisis that pushes the United States to expand its presence in the Middle East, while pushing Israel to escalate its covert war against Iran. </strong>The anti-government protests in Iran over the death of a young woman in police custody will persist intermittently. But the demonstrations are unlikely to see Iran&rsquo;s conservative government enact any significant social reforms, which would risk communicating a willingness to concede on protesters&rsquo; other demands for more radical political reforms. Instead, Tehran will probably maintain its heavy-handed crackdown on the protests &mdash; stoking domestic instability, empowering hard-line policies and deepening distrust between Iran and Western countries that makes resolving the nuclear crisis more difficult. The October 2023 expiration of the U.N. arms embargo on ballistic missile technology against Iran could see Iran transfer more missiles to Russia over the next year, on top of those Tehran has already provided to Russian troops fighting in Ukraine. This, coupled with Tehran&#39;s continued nuclear advancements, will stoke Western concerns about weapons proliferation and lead to more U.S. and EU sanctions targeting the country&rsquo;s nuclear and defense sector. The growing chasm between the West and Iran will also paralyze U.S. efforts to draw down military presence in the Middle East, and lead to increased Iranian military provocations against the U.S. military and regional economic interests. In addition, Iran&rsquo;s advancing nuclear program will intensify calls by hard-liners in Israel and the United States to launch a military strike to set back Iran&rsquo;s nuclear progress. Israel, however, is unlikely to conduct such a direct attack on Iran without U.S. support, which Washington will be wary of granting due to the risk of spurring another military conflict in the Middle East. Israel will thus likely focus on pursuing less aggressive means of weakening Iran&rsquo;s nuclear program, such as through covert action and cyber attacks.</p>

A New Crisis Over Iran’s Nuclear Program 

<p><strong>Uruguay will continue to negotiate a free trade deal with China, as well as its entrance into the Trans-Pacific Partnership &mdash; increasing friction with Mercosur partners Argentina, Brazil and Paraguay. </strong>Uruguay&rsquo;s push to unilaterally negotiate free trade agreements outside of Mercosur (which violates the South American trade bloc&rsquo;s rules) will result in continued diplomatic tensions with Argentina, Brazil and Paraguay. However, Brasilia, Buenos Aires and Asuncion are unlikely to suspend Montevideo from Mercosur for fear of collapsing the bloc and disrupting their tight trade ties. Moreover, Uruguay is unlikely to reach the final stages of its trade negotiations in 2023, as the government will strategically wait till after elections in Argentina in late 2023 (when a more pro-economic opening government is likely to come into power) to strengthen its negotiation position. Though Mercosur will not collapse this year, these increased tensions, combined with Uruguay&rsquo;s push to break free from the bloc&rsquo;s high common external tariff and customs union, could accelerate the bloc&rsquo;s demise later in the decade.&nbsp;<br />&nbsp;</p>

Further Cracks Emerge in South America’s Trade Bloc

<p><strong>Countries across sub-Saharan Africa will face food insecurity, humanitarian emergencies, subsidy cuts and labor crises against a backdrop of increasing debt burdens, which will trigger political volatility.</strong> A global economic downturn will raise the risk of financial instability and sovereign debt defaults across the region, as countries teetering on the edge of economic crises (most notably Ghana) contend with high interest rates, weakening global commodity prices, a strong U.S. dollar and slow economic growth. And countries already in default (like Chad and Zambia) will face challenging recovery prospects. Worsening economic conditions will inflame long-standing societal grievances over issues such as unemployment, inequality and food insecurity. But governments will be unlikely to pacify discontent through increased public spending without worsening their debt burdens. Economic hardship combined with social crises and perceptions of insufficient state responses will likely trigger public demonstrations demanding government action in the Democratic Republic of Congo, Ghana, Senegal, South Africa and Zimbabwe, among other countries. Taken together, these factors will produce greater political volatility, as leaders attempt to assign blame to political scapegoats, opposition parties attempt to take advantage of ruling parties&rsquo; waning popularity, and heads of state use cabinet reshuffles as evidence of political change. This will lead to investor flight to lower-risk investment destinations in most cases and, in some cases, greater regulatory uncertainty. But in extreme cases, opportunistic military leaders may try to capitalize on social grievances and economic hardship to carry out coups (particularly in the Sahel).&nbsp;<br />&nbsp;</p>

2023 ANNUAL FORECAST: A GLOBAL OVERVIEW

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