Inflation, energy shortages, and global instability are going to contribute to market turbulence for at least another year.
Those who come bearing warnings are rarely popular. Cassandra didn’t do herself any favors when she told her fellow Trojans to beware of the Greeks and their wooden horse. But, with financial markets facing unprecedented turbulence, it’s important to take a hard look at economic realities.that one-third of the world’s economy will be in recession in 2023.
Russian supplies have been slashed by sanctions related to the war in Ukraine, while Europe’s energy architecture suffered irreparable damage when a blast destroyed part of the Nord Stream 1 pipeline. It’s irreparable because new infrastructure takes time and money to build and ESG mandates make it tough for energy companies to justify large-scale fossil fuel projects.Meanwhile, already strong demand will only increase once China emerges from its COVID-19 slowdown.
In recent years, the mining of crucial rare earth has been outsourced to countries with abundant cheap labor and lax tax regulations. As these processes move to high-tax and high-wage jurisdictions, the sourcing of raw materials will need to be reenvisioned. In some countries, this will lead to a rise in exploration investment. In those unable to source commodities at home, it may result in shifting trade alliances.
Past inflationary cycles have ended when prices rose to a point of unaffordability, triggering a collapse in demand . This process is straightforward when it comes to discretionary purchases but problematic when necessities such as energy and food are involved. Since consumers and businesses have no alternative but to pay the higher costs, there is limited scope to ease upward pressure, particularly with many governments subsidizing consumer purchases of these staples.
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