Those that come with caveats are rarely popular. Cassandra did herself no favors when she told her fellow Trojans to beware of the Greeks and their wooden horses. But, with financial markets facing unprecedented turbulence, it’s important to keep a close eye on economic realities.
Analysts agree that the market faces serious headwinds. The International Monetary Fund has predicted that one-third of the world’s economies will be in recession in 2023. Energy demand is high and supply is low, prices are high and growing and emerging economies are emerging from the pandemic in a volatile state.
Realizing that there are no clear options for investors in an uncertain environment, there are five fundamental — and interrelated — issues that will be troubling for property markets in 2023. Every decision requires a trade-off.
Lack of net energy
Without dramatic changes in the geopolitical and economic landscape, the fossil fuel shortage seems likely to continue into next winter.
Russian supplies have been curtailed by sanctions related to the war in Ukraine, while Europe’s energy architecture suffered irreparable damage when an explosion destroyed part of the Nord Stream 1 pipeline. This is irreplaceable because building new infrastructure takes time and money and ESG mandates make it difficult for energy companies to justify large-scale fossil fuel projects.
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Meanwhile, strong demand will only pick up once China emerges from its Covid-19 recession. Record growth in renewable energy and electric vehicles has helped. But there are limits. Renewable resources require hard-to-source elements such as lithium, cobalt, chromium and aluminum. Nuclear will ease the pressure, but bringing new plants online can take years and garner public support.
Recovery of construction
The pandemic’s supply chain shocks and Russia’s invasion of Ukraine have fueled appetites in major economies to restart production. While this may prove to be a long-term boon for domestic growth, recovery takes investment, time and the availability of skilled labor.
In the short to medium term, the recovery of jobs from low-cost offshore locations will feed inflation in high-income countries as it raises wages for skilled workers and cuts into corporate profit margins.
Transition to commodity-driven economies
The same constraints that fuel the reshoring trend have prompted countries to seek safer – and greener – raw material supply chains within their borders or with allies.
In recent years, significant rare earth mining has been outsourced to countries with abundant cheap labor and lax tax regulations. As these processes move to higher tax and higher wage jurisdictions, raw material sources will need to be restructured. In some countries, this will lead to an increase in exploration investment. For those unable to source goods at home, this could alter trade alliances.
We can expect such alliances to mirror the geopolitical shift from a unipolar world order to a multipolar system (more on that below). For example, many countries in the Asia Pacific region will be increasingly likely to prioritize China’s agenda over America’s, which will affect US access to goods from Asia.
Given these pressures, inflation is unlikely to slow down anytime soon. This poses a major challenge for central banks and their favorite tool for controlling prices: interest rates. High borrowing costs will have limited power now that we have entered an era of secular inflation, with supply/demand imbalances due to unfolding globalization.
Past inflationary cycles ended when prices reached the point of inefficiency, which triggered a collapse in demand (demand destruction). This process is straightforward when it comes to discretionary purchases but problematic when necessities like energy and food are involved. With consumers and businesses having no choice but to pay higher costs, there is limited opportunity to reduce upward pressure, especially since many governments are subsidizing consumer purchases of these staples.
Accelerating decentralization of key institutions and systems
This fundamental change is being driven by two factors. First, disrupted supply chains, tight monetary policy and conflict have touched off restructuring in the geopolitical world order. Second, the chaotic response to COVID-19, the global erosion of trust in institutions due to economic problems and widespread misinformation.
The first point is key: Countries that once considered the United States an opinion leader and enforcer of orders are questioning this alignment and filling the gaps in regional relations.
Meanwhile, distrust in institutions is growing. A Pew Research Center poll found that Americans are suspicious of banks, Congress, big business and health care systems — even of each other. Growing protests in the Netherlands, France, Germany and Canada make it clear that this is a global phenomenon.
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Such discontent has also fueled the rise of far-right populist candidates, most recently with the election of Giorgia Meloni in Italy.
It has also spurred a growing interest in alternative ways of accessing services. Homeschooling increased during the pandemic. Then there is Web3, designed to provide an alternative to traditional systems. Join the Bitcoin (BTC) community at the Beef Initiative, which seeks to connect consumers with local ranchers.
Historically, periods of extreme centralization have been followed by waves of decentralization. Think of the dissolution of the Roman Empire over local lands, the back-to-back revolutions of the 18th and early 19th centuries, and the rise of antitrust laws in the West in the 20th century. All saw monolithic structures broken down into component parts. Then the slow process of centralization began again.
Revolutionary technologies are accelerating today’s transition. And while the process isn’t new, it’s disruptive — to markets and society. Markets, after all, thrive on the ability to calculate outcomes. When the cornerstone of consumer behavior is undergoing a phase change, this is even more difficult to do.
Taken together, all these trends indicate a period in which only cautious and opportunistic investors will come out ahead. So fasten your seat belt and get ready for the ride.
Joseph Bradley Head of Business Development at Heirloom, a software-as-a-service startup. He started in the cryptocurrency industry as a freelance researcher in 2014 before moving on to work at Gem (which was later acquired by BlockDemon) and later moved into the hedge fund industry. He received his master’s degree from the University of Southern California with a focus on portfolio construction/alternative asset management.
This article is for general information purposes and should not and should not be construed as legal or investment advice. The views, opinions and opinions expressed herein are solely those of the author and do not necessarily reflect or represent the views and opinions of Cointelegraph.