Challenges for the Eurozone
In this commentary, Kenneth Rogoff highlights a potential risk for the Eurozone:
Italy is another example of latent risk. In many ways, ultra-low interest rates have been the glue holding the eurozone together. Open-ended guarantees for Italian debt, in line with former European Central Bank President Mario Draghi’s 2012 promise to do “whatever it takes,” were cheap when Germany could borrow at zero or negative rates. But this year’s rapid interest-rate hikes have changed that calculus. Today, Germany’s economy looks more like it did in the early 2000s when some called it “the sick man of Europe.” And while Europe is comparatively new to ultra-low rates, one has to be concerned that a sustained wave of monetary tightening could, as with Japan, reveal enormous pockets of vulnerability.
The Looming Financial Contagion
By: Kenneth Rogoff – Harvard University
Challenges for the US
Larry Summers warns that the Fed’s choices in 2023 will get harder as it tries to balance the risk of stagflation with the risk of a dangerous downturn especially since liquidity issues could arise:
It is a tribute to the 2010 Dodd-Frank financial regulations that so much monetary tightening has taken place with so little market trauma. But regulators need to be alert to issues of liquidity in a number of markets and to the very substantial divergences that have opened in recent months between public market valuations and the value at which many assets are being carried on private balance sheets. They also need to be conscious of the possibility that well intentioned regulatory safeguards will interfere with liquidity in key markets.
What the Fed should do next on inflation
By: Larry Summers – Harvard University
Challenges for China
Tianlei Huang and Mary E. Lovely warn that China will struggle to find a new growth model going forward:
Given the bleak outlook for the global economy, external demand for Chinese goods will almost certainly continue to worsen into 2023. Meanwhile, Chinese imports will likely expand as domestic demand gradually recovers. Net exports, therefore, will lose even more steam to sustain growth next year.
China’s recovery will depend on domestic investment and consumption. Investment has been a stabilizing force this year, but its role will subside in 2023. Strong growth in public sector investment, especially in infrastructure and manufacturing, has helped make up for the sharp contraction in property investment and for sluggish private sector investment. But given tightening fiscal constraints for local governments, it will be difficult for China to continue to rely on infrastructure investment to revive growth.
China’s dismal closeout of 2022 suggests shaky start for 2023
By: Tianlei Huang, Mary E. Lovely – PIIE
Geopolitical challenges
In this commentary, Richard Haass, President of the Council on Foreign Relations, highlights two possible and important geopolitical changes for 2023:
[T]he sleeper story of the year will be Japan’s emergence as a major geopolitical actor. Economic growth in the world’s third-largest economy has been revised upward to 1.5%, and defense spending is now on track to double, reaching 2% of GDP. Japan, with one of the most capable militaries in the region, will also more closely align itself with the US to deter or, if necessary, defend against Chinese aggression against Taiwan. Even more than is the case with Germany, 2023 will be the year Japan enters the post-post-World War II era.
Lastly, Iran will likely be the dominant issue of 2023. The protests against the regime will gain traction against the backdrop of worsening economic deterioration and emerging divisions within the leadership over whether to compromise with the protesters or arrest and kill them. The 2015 nuclear deal will not be revived, given Iran’s military assistance to Russia and the US desire to avoid throwing an economic lifeline to the embattled regime.
What in the World Will Happen in 2023?
By: Richard Haass – President of the Council on Foreign Relations
