John Bennett
Global Head of Government Affairs
Cyber Risk
San Francisco
Wed, Dec 7, 2022
10 Trends to Watch Heading Into 2023
The global economy faces a critical juncture with a number of parallel and related crises. 2023 promises to be a tougher ride for most businesses, investors and consumers globally, but there is always opportunity in volatility. We analyze the top 10 trends we expect as policymakers do their best to navigate this economic, geopolitical and regulatory polycrisis. Rarely has the world faced this many interconnected crises but we expect that the outlook in 2024 will be less volatile.
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As we look to 2023, the global economy faces a critical juncture with a number of parallel and often related crises. The polycrisis upon us includes the legacy of COVID-19, a war in Europe, a huge energy shock, significant inflation, a global monetary tightening cycle, a strong U.S. dollar, the slowest growth in recent history for China, global indebtedness and increasing tensions between the U.S. and China, to name a few. This is to say nothing of the turmoil playing out in financial markets as the decades-long negative correlation between bonds and stocks has broken down, causing both to decline simultaneously. As years of cheap money come to an end and the tide of liquidity goes back out, we are starting to discover who is exposed. Global debt to GDP exceeds 300%, but countries are going to have to spend a lot more money to address the polycrisis. In doing so, they will be working against central banks, which will continue to withdraw accommodation in an effort to lean against inflation. We analyze 10 trends we expect in 2023 as policymakers do their best to navigate this economic, geopolitical and regulatory polycrisis.
This has had a clear impact on the real estate sector, with existing home sales slowing significantly, and there are nascent signs that the labor market has begun to loosen, with job openings coming down marginally. Peak inflation likely hit in September, with both headline Consumer Price Index (CPI) and core CPI abating in October and the New York Fed’s Underlying Inflation Gauge indicating an inflection point for inflation earlier in 2022. We expect that the Fed will hike rates to above 5% in 2023 to lean against inflation and that this will ultimately trigger a recession. Given the ongoing robustness of the U.S. economy and labor market and the significant cash buffer among households and corporates in the U.S., we expect the recession to hit in the second half of 2023. A key downside risk for the U.S. next year is the debt ceiling, as a gridlocked government will have difficulty agreeing to lift it. Our base case scenario is that there will be a standoff over the debt ceiling, but ultimately there will be bipartisan agreement on raising it. If this is wrong and the U.S. were to default on its debt, it would be catastrophic for not only the U.S. but also for the global markets. Europe has been disproportionately impacted by Russia’s war on Ukraine, with energy costs rising significantly and high inflation sparking a cost-of-living crisis. This autumn has been unseasonably warm, and according to the Copernicus forecast, the winter is expected to be mild as well.
With European energy storage at over 95% full on average according to Bloomberg, Europe should manage to avoid energy rationing this winter, provided the weather forecasts are accurate. Next winter is much more uncertain, as Europe will have to refill its storage without access to Russian energy and with more competition from China for liquefied natural gas (LNG). Consumer and business confidence across Europe has fallen significantly and both manufacturing and services are in contraction for the eurozone and the UK. We expect that Germany and Italy are already seeing output fall and we forecast the eurozone to be in recession in early 2023. The UK economy has already reported falling output in late 2022, likely the beginning of a protracted recession. After the market revolt in response to a fiscally lax budget under former Prime Minister Liz Truss’ government, the new British government has announced an austere autumn budget. This has reinstated trust in the fiscal responsibility of the UK government but it will be a further drag on growth over the next few years. The European Central Bank (ECB) and the Bank of England have tightened the monetary policy, but less aggressively than the Fed. This is appropriate given that the eurozone and the UK have lower potential growth and inflation has been driven primarily by supply-side factors, which central banks cannot do much to influence. We expect peak policy rates in 2023 of 2.5% for the ECB and 4.5% for the Bank of England.
Still, China will have difficulty learning to live with Covid given the country’s relatively low vaccination rate, low natural immunity and lack of mRNA vaccines. As officials try to boost the vaccination rate and new cases spread over the winter, we expect some restrictions to remain, which may disrupt global supply chains as they did earlier in the pandemic. Consumer and business confidence should improve as restrictions are loosened but an increase in mortalities may restrain this. Growth in Brazil has surprised to the upside in 2022 as a result of the fiscal policy and resilient credit extension despite a tight monetary policy. Luiz Inacio Lula da Silva narrowly defeated President Jair Bolsonaro in a runoff election, with outgoing President Bolsonaro conceding his defeat. A peaceful transfer of power should boost confidence and increase foreign direct investment flows to Brazil in 2023.
We also expect fiscal expansion under President Lula in 2023, with higher public sector salaries, a rise in social spending and an increase in the minimum wage. India is expected to grow the fastest among emerging markets in 2023, though we expect growth to slow moderately from nearly 7% in 2022 to around 6% in 2023. India’s economic model is based on the services sector outsourcing from developed markets, digitalization and structurally rising domestic demand. While India already serves as an outsourcing center for business services, we expect manufacturing to increasingly be outsourced to India as a result of government tax incentives. India is also likely to benefit from cheap oil imported from Russia in 2023, as we expect India to continue to remain outside of Western sanctions on Russia.
A default and International Monetary Fund (IMF) program ensued, and as a middle-income country, Sri Lanka was not granted access to the Common Framework. African nations, which benefited from a global search for yield in the post-2008 global financial crisis, are particularly vulnerable. The G20 established the Common Framework in 2020 for low-income countries as a mechanism to facilitate debt restructurings, whereby all public and private sector creditors—crucially, including China—agree to accept the same terms. We expect a number of both low- and middle-income countries to request debt restructurings in 2023, with the latter denied access to the Common Framework. This will make debt restructurings more complex, given China is the world’s largest bilateral creditor, and the terms of China’s lending are broadly unknown. Other creditors will be reticent to agree to write-downs if they suspect China will get preferential terms. The longer it takes to agree on a debt restructuring, the bigger the hit to growth for the country in distress and the greater the ultimate write-down. Haircuts and negotiation times are typically smaller and shorter in preemptive debt restructurings (i.e., prior to a payment default) than in post-default restructurings, according to the IMF.
In addition, the significant economic ramifications and the required structural and fiscal reforms to address them often lead to a longer recovery period beyond the sovereign crisis itself. According to the World Bank (WB), the 41 countries that defaulted on their government debt between 1980 and 1985 needed an average of eight years to reach pre-crisis GDP per capita levels. We have little doubt that demand for IMF and WB support will rise in 2023. The main question is whether there will be a lost decade for emerging markets, like the Latin American debt crisis of the 1980s. Unlike the 1980s, most EM countries are in current account surplus and have greater foreign exchange reserves. A number of EM central banks also began hiking interest rates aggressively before the Fed, mitigating the depreciation of their currencies. We expect a lost decade to be avoided, though with global debt to GDP just below 350% and a global rate hiking cycle, there is a risk of contagion from defaults. Such defaults would also expose governance failures and corruption allegations that are often associated with such financial crises.
Higher interest rates can decrease the value of companies due to an increase in their cost of capital. The Fed's current rate path is likely to lead to a U.S. recession in the second half of next year, with the eurozone following in early 2023. The UK is probably already in recession.
While several companies have raised their prices, passing on some of their increased raw materials, transportation and labor costs to their customers, many are feeling the operating margin compression. Earnings pressure will likely persist into much of 2023, particularly for companies more vulnerable to rate rises (real estate and REITs) or recession (consumer durables). Moreover, consumer confidence remains at historically low levels, which may lead to a decline in demand for goods and services or a switching to low-cost offerings, which is not a good omen for revenue growth. Higher cost of capital will also bite into company and fund valuations, and uncertainty where interest rates will land will add further pressure to those that carry a lot of debt. With central banks hiking rates and shrinking their balance sheets and many investors shifting into cash, liquidity has been withdrawn at a rapid pace in 2022.
This has left even the biggest, most liquid asset class in the world–U.S. Treasuries–shallow and volatile. U.S. Treasuries are the foundation for the risk-free rate, the building block to the pricing of many securities globally. A showdown on the U.S. debt ceiling negotiations next year may prompt further volatility and rapid moves in Treasury yields.
Tightening monetary policy and a need for fiscal expansion to address the cost-of-living crisis and higher energy costs across the developed world (particularly in Europe) are likely to cause swift market dislocations in 2023. The UK gilt market blowout in 2022 is a harbinger of things to come. These dislocations are unlikely to originate in the banking sector, thanks to greater regulation and higher capital requirements post-Global Financial Crisis. But this means sharp moves in markets are likely to come from the shadow banking sector, where there is very little visibility. We expect central banks will step in to paper over these liquidity incidents–as the Bank of England did in the fall of 2022–but the risk is that investors view these interventions as inflationary, undermining central bank efforts to curb inflation.
Most immediately, this will raise tensions between China and Taiwan–a key strategic ally of the U.S.–and, perhaps more than any other part of the world, a country upon which the West and China are entirely dependent for next generation sophisticated semiconductors. U.S. efforts to wean itself from dependency on Taiwan will likely take several years to work, and in the meanwhile, a Chinese takeover would be very nearly crippling. Right now, there is a cold war over future technologies, with very real economic casualties on both sides. In China, the technology and military complexes have been impaired by new U.S. export restrictions.
In the U.S., semiconductor and semiconductor adjacent companies have been stung by the loss of significant export revenues. One bright spot: the degree of economic inter-dependence between the West and China is so comprehensive that it may serve to buffer any major escalations. Additional trade tensions are brewing between the U.S. and the EU, with the latter complaining of provisions in the Inflation Reduction Act that will provide subsidies for American-made electric vehicles (EVs). We expect the EU will respond with a series of its own subsidies, but tariffs and sanctions cannot be ruled out.
The question for 2023 will be whether the changes Russia made in response–including a politically contentious mobilization of additional troops and the use of Russian missiles away from the battlefield to attack Ukrainian infrastructure–can re-establish Russian military parity. There is likely to be somewhat of a pause in the fighting over the winter, but the period following that pause will be crucial to see if battlefield dynamics have changed at all from what we saw at the end of 2022. Beyond the battlefield, there is the ever-present question of whether, if faced with the possibility of losing the war, Russian President Putin will choose to escalate beyond traditional battlefield fighting. The most discussed scenario involves Russia deciding to use its nuclear arsenal–most likely a tactical nuclear weapon on the battlefield–but the possibility of a strategic nuclear weapon launched against Ukraine (or even a NATO country) cannot be ruled out. Cyberattacks against Ukraine or its backers also remain a possibility. While the likelihood of either form of escalation remains low, both would generate tremendous uncertainty, with a range of possible responses from the West. There are strategic reasons for both the Russians and the West to be ambiguous about their plans in this regard, so contingency planning for a variety of outcomes is recommended.
The rest of the world will also continue to be impacted by the downstream effects of the war. Europe is likely to face a difficult winter with very high energy prices, although perhaps buffered a bit if warmer than expected temperatures continue through the winter and, from December 5, by the imposition of a $60/barrel price cap on Russian oil. As European unity in support of Ukraine has been one of the most important facets of the international response to Russia’s invasion, it will be important to keep an eye on whether that unity is dented by high energy prices, especially as European leaders are likely to be well aware of the success of populist parties in recent Swedish and Italian elections. In the United States, support for Ukraine is likely to be under less of a threat than if the “red wave” had materialized and the Republicans had taken control of the Senate, but Republican control of the House may make it more difficult for President Biden to secure continued funding for weapons for Ukraine. Looking beyond the West, Russia’s continued cooperation with the UN-brokered Black Sea Grain Initiative is not a foregone conclusion, and should Russia choose to withdraw from the agreement after the most recent 120-day extension later this year, it could have ramifications for food security and prices globally, especially in the global South.
Just as the threat of new epidemics is increasing, so too is the vulnerability of the U.S. and Europe. Anti-vaccine groups are using the same information tactics as political movements, which may be leading to the return of previously eliminated diseases like polio to the U.S. and the UK. War and civil disruption further complicate access to sanitation, medications and health care, leading to outbreaks of vaccine-preventable and gastrointestinal diseases. What this means for businesses and other organizations in 2023 is the need to have plans in place and prioritize being prepared if public health impacts business. First, consider health when assessing risks to your workforce, customers, facilities and supply chains.
It’s important to consider scenarios in which your office might have to close again due to infectious disease, such as a new COVID-19 variant or a new flu strain. Second, consider steps your organization can take to reduce the vulnerability of your workforce through vaccination drives, wellness programs and upgrades to air ventilation and disinfection. Third, consider what you can do to promote the health of your employees’ families and communities; even if an epidemic does not directly involve your business, it could afflict the children of your employees, meaning many days of reduced productivity. Finally, maintain situational awareness. The earlier you can detect a new threat, the more likely you can implement a mitigation plan that puts you ahead of your competitors.
The U.S. Securities and Exchange Commission (SEC) will likely issue new rules on climate-related disclosures (by corporations) and finalize proposed amendments to their rules to promote disclosure of consistent, comparable and reliable information with respect to ESG factors (by funds). The Sustainable Financial Disclosure Regulation (SFDR), launched in the EU in 2021, continues to gain traction and will be a focus of individual country regulators. In January 2023, the SFDR will become mandatory for financial market participants and participants will be required to comply. The European Securities and Markets Authority (ESMA), the counterpart to the SEC in Europe, has recently outlined its enforcement priorities for the coming year for International Financial Reporting Standards (IFRS) filers, with climate-related matters identified as the number one priority. Demand for increased ESG transparency is expanding within the Asia Pacific region as well on a country-by-country basis.
Importantly, the International Sustainability Standards Boards (ISSB) is expected to issue a comprehensive set of global sustainability-related disclosure standards with a specific emphasis on evaluating the impact of ESG on enterprise value—a key aspect for investors’ decision-making. Some of these disclosures will continue to be voluntary, but others will be mandatory and subject to audit requirements. As greenwashing claims continue to surface, regulators are ramping up their scrutiny of ESG claims by funds and companies. With a bigger push to align executive compensation with ESG measures and not solely shareholder returns, this will also sharpen the minds of the boards of all companies.
Beyond reporting, regulators around the world are starting to move into ESG-related due diligence, with compulsory human rights due diligence legislation already introduced or under discussion in several jurisdictions— and gaining substantial public support in the process. For regions or sectors where law makers have been slower, companies are proactively taking their own measures driven largely by their company values, risk management strategies and external stakeholder expectations. Many are reinforcing due diligence processes in line with the UN Guiding Principles on Business and Human Rights (UNGPs) and the Organization for Economic Co-operation and Development’s (OECD) Guidelines for Multinational Enterprises. Recent research also shows an increase in companies incorporating human rights abuse factors into compliance programs, rising 11% globally from 24% in 2021 to 35% in 2022.
Throughout 2023, we also expect to see increases in ESG litigation being brought against companies by activists, investors and individuals. Greenwashing and misleading investment-related claims are two obvious areas, however, like ESG itself, cases will cover a range of areas such as breaches in supply chain practices, fiduciary duties and diversity and inclusion initiatives. Companies investing in their ESG frameworks and policies, and ensuring effective implementation throughout the organization, is no longer a “nice to have” but a must have in order to counter risks to the reputation and value of their brand and deliver strong, long-term benefits for the company and society.
In addition, the agency announced a record $6.4 billion in monetary relief and a 9% increase in year-over-year enforcement actions. The rulemaking pace in fiscal 2023 will likely face headwinds not only in response to the change in control of the U.S. House of Representatives, which is expected to step up its oversight of the agency’s activities and impact the agenda through budget appropriations, but also because of increasing industry concerns regarding the cost versus benefit of certain recently enacted rules and others that are still in the proposal stage. Despite this dynamic and the threat of post-enactment litigation, we expect that the Commission will prioritize the imposition of new rules relating to cyber security, certain private fund practices, insider trading by corporate insiders, climate disclosures, SPACs and money market fund reforms. In addition, the Commission can be expected to be heavily involved in discussions over regulations impacting the cryptocurrency market and exchanges. While rulemaking is expected to adjust to the political realities, the enforcement and examination agenda is expected to continue unabated.
Typically, the prevalence of fraud and other misconduct increases in distressed or volatile markets and so does the Commission’s efforts to detect and prevent violations that negatively impact investors or the integrity of financial markets. As a result, the enforcement and examination agenda is likely to continue unabated, with significant resources being devoted to digital assets and cryptocurrencies, investment adviser misconduct, corporate disclosures, compliance with the marketing rule, disclosures to retail investors, valuation and board oversight, liquidity risk management, fees and expenses, undisclosed conflicts and the use of text and chat messages for business purposes on unarchived platforms. We advise that companies and firms continue to enhance their governance, supervisory, compliance policies and procedures and training with a risk-based approach to address regulatory exposures. In addition, the industry should be prepared to pivot to changes in regulatory mandates and to formulate a crisis response playbook that includes a credible assessments and remediation of the actual–or potentially violative–conduct or deficiencies that are uncovered.
As a result, having networks subject to continuous security monitoring by experienced specialists is moving from being a good idea to a clear best practice. There is also no reason to believe that the kinds of zero-day attacks using previously unknown security vulnerabilities will cease, so keeping networks up to date on security patches will continue to be a vital part of an overall cyber security program. Cyber insurers have sharpened their focus on understanding risks before underwriting policies. Being able to demonstrate a commercially reasonable cyber security program with a strong compliance measurement component and continuous network monitoring by expert security specialists will become increasingly important for managing premiums and for availability of coverage.
Some sectors, like cryptocurrency and decentralized finance (DeFi), are likely to be targeted by both cybercriminals who have seen substantial success in those areas as well as regulators around the world who–particularly in light of recent high-visibility bankruptcies and thefts–see the sectors as chaotic and with unnecessarily high-risk. In addition to a heightened cyber environment, social media is undergoing rapid changes, dramatically increasing reputational and security risks to corporate brands, assets and people. While executive- and board-level awareness of risk from social media and online harms didn’t develop overnight, it’s been exacerbated by recent headlines highlighting social media platform layoffs to critical compliance, security and Trust & Safety functions and potential government actions.
As platforms wrestle with challenging headwinds and growing calls for regulation, corporate leadership teams are not only coming to terms with the ubiquity of social media, they’re also recognizing its undeniable influence on brand reputation. We’ve also seen the expansion of alt-tech platforms, which enable certain actor groups who disagree with a company’s position to organize out of sight from security, risk, HR, public affairs and social media teams. This can translate into a reputation-damaging incident, or a legitimate security threat. 80% of CEOs believe more companies will be targeted by individuals and organized groups of internet savvy actors resulting in even higher social media attacks over the next 12 months.
These incidents are increasingly surfacing on mainstream social media platforms as well, targeting executives, celebrity spokespeople and social media influencers with hate speech, offensive content and physical threats. Consumers are taking notice and tolerating less. Many say this harmful content damages the brand’s reputation and, when spotted on company-owned social media pages and advertising campaigns, can deter purchase. Early identification of risks from online sources, actionable analysis and integration and data sharing among cross-functional teams will be essential for the safety and security of corporate brands, assets and people. Sharing risk intelligence at pace with the speed and velocity of social media will help corporations mitigate risks and navigate social media uncertainty, which is likely to continue into and throughout 2023.
Conclusion
2023 promises to be a tougher ride for most consumers, businesses and investors globally, but there is always opportunity in volatility. While the developed markets face a recession, countercyclical businesses, such as restructuring and bankruptcies, should see increased deal flow and merger and acquisition activity could accelerate as firms that have weathered the storm hunt for bargains. Emerging markets will buoy global growth, though there are risks to the outlook for China, and an emerging market sovereign debt crisis could embroil some middle and particularly low-income countries. The war in Ukraine is likely to persist, with significant implications for Europe, geopolitics and energy. The green transition is likely to be accelerated by the war, with governments aiming to mobilize private capital to achieve this. We expect ESG regulations to increase in 2023, which should improve measurement issues and reduce greenwashing. We expect trade tensions to escalate between the U.S. and China, and also perhaps between the U.S. and Europe. While we are all “finished” with COVID-19, the virus may not be finished with us—not to mention other viruses that could emerge. Cyber-related threats will continue to impact the public sector, corporate brands, assets and people, buoying the cybersecurity industry over the course of next year. Rarely has the world faced this many interconnected crises, but we expect that the outlook in 2024 will be less volatile, with most of the developed world coming out of a shallow recession, inflation abating and the green transition having made significant progress, particularly in Europe.
We expect ESG regulations to increase in 2023, which should improve measurement issues and reduce greenwashing. We expect trade tensions to escalate between the U.S. and China, and also perhaps between the U.S. and Europe. While we are all “finished” with COVID-19, the virus may not be finished with us—not to mention other viruses that could emerge. Cyber-related threats will continue to impact the public sector, corporate brands, assets and people, buoying the cybersecurity industry over the course of next year. Rarely has the world faced this many interconnected crises, but we expect that the outlook in 2024 will be less volatile, with most of the developed world coming out of a shallow recession, inflation abating and the green transition having made significant progress, particularly in Europe.
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