Predicting the future is a mug's game as Douglas Adams famously said, but after a tumultuous three years, 2023 might turn out to be a bit calmer, so I’ll give it a try. In general, I am quite optimistic about the year to come. The most important development to look at is the war in Ukraine. With Russia ot making any advances and even rumours that it might run out of ammunition in the not too distant future https://www.economist.com/the-economist-explains/2022/12/20/is-russia-running-out-of-ammunition, my bet would be that there will be some sort of agreement to end active hostilities by summer. This might not cover all of the current Ukrainian demands (e.g. a full Russian withdrawal, including Crimea https://www.nytimes.com/2022/12/28/world/europe/ukraine-russia-peace-talks.html), but it will definitely bring some respite to international energy and food markets. A textbook example of how external shocks can also be positive. Coupled with a regime change in Iran https://www.euronews.com/2022/12/20/iran-protests-what-caused-them-who-is-generation-z-will-the-unrest-lead-to-revolution this should calm energy markets and prices should drop down to 2021 levels or even further, given that there has been a lot of energy diversification and saving efforts in most of the major markets. This in turn will help to dampen one of the main drivers of the current high rates of inflation. This gives me hope that current levels of inflation will not persist for a longer period of time, but were a one-off caused by the increase of monetary supply as part of the early reactions to Covid, similar to the Bullwhip Effect https://en.wikipedia.org/wiki/Bullwhip_effect. Taken together, this should lead (again) to lasting lower levels of interest rates (or at least no further raises) which will help to dampen recessions https://www.cnbc.com/select/how-do-increasing-interest-rates-affect-inflation/. The worst-case economic scenario at the moment is a combination of high interest rates as a result of an increased money supply after Covid leading to higher interest rates as central banks try to dampen inflation according to their inflation targets, e.g. 2% for the European Central Bank. High interest rates further dampen growth or push countries into recession. You might have come across the term stagflation https://www.economist.com/the-world-ahead/2022/11/18/companies-must-battle-the-beast-of-stagflation - companies would be faced with rising cost, but stable or dropping sales. If managed well, this can go on for a while, but could put cost pressure on companies which might decide to lay off workers to save cost and/or because they are not needed if demand fall. Higher rates of unemployment will deepen a recession (lower consumption leads to further stagnation, the state needs to pay more in benefits and might be forced to raise taxes, further squeezing the economy. In the more positive scenario, capital markets will look different as well as higher interest rates usually push down share prices https://www.forbes.com/sites/qai/2022/09/20/do-higher-interest-rates-hurt-the-stock-market-how-do-smart-investors-adjust-as-rates-go-up/?sh=5fc97e50b0fd - one reason is that the net present value of investments is discounted with higher interest rates, so NPVs are lower. Once interest rates drop again, options like venture capital should be coming back. What could spoil this recovery? Should the war in Ukraine not end, inflation might stay higher for longer. Central banks could be overly cautious and not lower interest rates or at least do so at a lower speed than required for a recovery. Let’s have a look at potential trouble spots for 2023. Despite all of the belligerent rhetoric, nothing will happen to Taiwan in 2023. After suddenly dropping all Covid restrictions, China will be far too busy with dealing with waves of infections and their aftermath https://www.economist.com/china/2022/12/28/covid-19-is-tearing-through-china The more interesting question is the economic consequences of this chaos (there could be hundreds of millions of Covid cases) and also if a dip at the beginning of 2023 can be compensated by higher growth later in the year. This could also mean the arrivals of new variants which might even be resistant to vaccines, so there could be a scenario with fresh lockdowns on the horizon. I think this is unlikely and there is a whole arsenal of preventive measures that could be used first. On a different note, some companies are moving out of China or at least looking for alternatives https://www.economist.com/business/2022/11/24/multinational-firms-are-finding-it-hard-to-let-go-of-china, so all this might mean that we get some more talk whether we have seen “Peak China”. At least geographically close to China is North Korea, but it seems that despite the usual threads, there will be no major escalation https://www.bbc.com/news/world-asia-64123657 The coming elections in Turkey https://www.reuters.com/world/middle-east/turkeys-ak-party-mulls-bringing-elections-slightly-forward-2023-01-02/ might get messy and the ruling party could be tempted to stir some trouble in the run-up, e.g. with Greece over some islands, but hopefully mutual allies will convince Turkey to act with restraint. After all, both countries are members of NATO. On a longer term, climate change and its effects (average temperatures raising with hot summers, but also cold spells in winter in Europe) will continue to be the biggest challenge to be tackled, but this is unfortunately not a job to be done with a year. A global raise by temperatures below 1.5 degrees would mean that most of the Tropics will remain habitable https://www.theguardian.com/science/2022/jul/31/why-you-need-to-worry-about-the-wet-bulb-temperature - the reverse scenario is almost unthinkable white 100s of millions forced to migrate because their current home will become uninhabitable as the human body is unable to bear extreme heat over a prolonged period of time https://climate.nasa.gov/ask-nasa-climate/3151/too-hot-to-handle-how-climate-change-may-make-some-places-too-hot-to-live/. As for the UK – not much joy, unfortunately. I think that there is a 40:60 chance to see a new Prime Minsiter before Summer. To stand a realistic chance in the 2024 elections, Sunak has to win both the general public with polling among younger voters abysmally low (2 % for those aged 18-24, 15 % for 25-49 https://www.politicshome.com/news/article/conservative-millennial-problem-polling-young-voters ) as well as his own party and backbenchers. This will be tricky in the best of times, but almost impossible if you need to introduce unpopular measures, cutting spending and increasing taxes at the same time in a period of economic turmoil. On top of that, he will also need to convince his backbenchers who will rebel against anything that will smell of cooperation with the EU https://www.theguardian.com/commentisfree/2022/dec/18/after-a-year-when-the-only-certainty-was-tory-chaos-could-2023-be-even-worse. Should a decade of real estate price growth be wiped out https://www.bloomberg.com/news/articles/2022-12-29/podcast-how-uk-house-prices-could-fall-by-30, the next general election will be interesting indeed. There is also the small detail of full border controls with the EU finally coming into force (unless they are again voluntarily postponed by the UK), so it is no surprise that economists expect the UK inflation to last for longer than in other countries and its economy to underperform https://www.ft.com/content/81fbdff6-dacb-476b-a4ba-12696e7f7800 To look into the crystal ball a bit further and to make this more fun, my predictions for capital markets at the end of 2023 would be: S&P 500 up by 10% to 4250, NASDAQ 100 up by 15% to 12500, FTSE 100 5% up to 8000. Bitcoin will close the year at USD 22500 with quite some up and downs. (Note that these are my own opinions and do not constitute any investment advice etc.) I’d be happy to hear your thoughts on this. Feel free to prove me wrong or post sources that tell different stories. As for the mug’s game, I will revisit this post in 12 months to see what has turned out to be true and what not.