2023 Geopolitical Trends

The following, a summary of expected trends for 2023, aims to support decision-making around risk mitigation and identifying new opportunities in the U.S., China and Europe. No decision is still a decision, and it is not always the most strategic choice.

The United States: Narrow Growth and Green Economy Success

An economic soft landing for the U.S. is plausible as some fundamentals remain solid. The consensus is growing that though a recession may still occur, it could be mild.

Higher interest rates are no longer surprising and are now integrated into expectations, reducing uncertainty. Interest rates are expected to peak around 5.0% to 5.25% in 2023. The Federal Reserve is not likely to reduce rates until inflation and the economy significantly improve, which could be in 2024.

The green economy and R&D-intensive industries are booming, and trends point to this continuing. Reshoring and nearshoring are leading with advanced manufacturing. The U.S. is a leader in innovative production, which has traditionally been a challenge for China.

Notable risks: Inflation spikes, a divided Congress unable to pass policies and continuing skilled labor shortages

Potential opportunities: Expanding manufacturing and R&D-intensive floorspace, businesses preparing the groundwork for stronger growth in 2024

China Reopening Turbulence

With China’s zero-COVID policy no longer in place, the country’s focus has shifted toward economic growth. Many countries emerging from the pandemic have had uneven and challenging transitions to a new normal, and China will likely experience the same. There could be supply chain gaps if waves of the labor force become ill in the first or second quarter. Lower seasonal demand during the early part of the year would weaken the impact.

China is moving through this turbulent phase and hopes to emerge around mid-year. The resulting impacts could be:

• Stronger economic growth means more demand for energy and commodities. Global energy and commodity price spikes could occur, disrupting U.S. attempts to reduce inflation

• Though China’s goal is economic growth, protectionism and authoritarianism remain influential factors. Additionally, investors have been cautious regarding Beijing’s opaque policymaking over the past few years. This caution may lead to more reshoring/nearshoring, especially for high-tech and sensitive goods.

Notable risks: Escalation with Taiwan (short of outright conflict), crackdowns on sectors important to the national interest, unpredictable COVID-19 policies

Potential opportunities: More trade-oriented logistics needs as growth increases, demand for U.S. goods within China will rise after reopening

U.S.-China Decoupling: Winners in Latin America and Southeast Asia

With increasing geopolitical tension, rising Chinese labor costs and unpredictable Chinese policies, nearshoring is here to stay. Latin America and Southeast Asia are two beneficiaries of this trend.

Latin America is experiencing more general stability, with a few exceptions, and recently elected leaders have been eager to ride the nearshoring wave. Commodity riches in critical minerals and energy are an added boon. Venezuela emerging from U.S. sanctions could provide extra political and energy stability.

Southeast Asian countries such as Vietnam, Malaysia and Indonesia are primed for growth, with an already existing export-focused economic base and abundant natural resources, including inputs for electric vehicle batteries. Outside of Myanmar, expectations for political stability are high.

Notable risks: Political quarreling limits opportunities in Latin America – especially in Mexico, Argentina and Peru; Southeast Asia’s vulnerability to energy shocks; China closing again could impact Southeast Asia and Latin America growth

Potential opportunities: Export-focused boom as China reopens, high-tech manufacturing in Southeast Asia and Central America, leveraging U.S. free trade agreements in Latin America, critical minerals sourcing in both regions

Europe in Transition: Mixed Growth and Keeping Pace with the U.S.

Near-term European growth could be limited in 2023 due to energy volatility, though a warmer winter is helping. Some markets will fare better, especially in Central and Eastern Europe (CEE); countries more reliant on Russian energy will face more difficulties. Alternatively, China’s reopening could provide a lifeline to export-oriented economies like Germany.

Non-Russian energy options, including natural gas, nuclear and renewables, are being expedited to reduce risks. For example, in 2022, solar panel adoption across the E.U. doubled year-on-year.

Indeed, 2023 is a year for Europe to expedite its green economy and lay the groundwork for future growth. The E.U. is behind the U.S. in terms of attracting green investment, but it is sure to issue new policies to rectify this situation. Innovation, long an asset of Europe, can drive opportunities around energy efficiency.

Notable risks: Hard winter drives up energy costs, weaker governments fall amidst inflation/energy crisis, fragmented policy response to the IRA

Potential opportunities: New green economy growth, logistics relocation to lower-cost locations in CEE, R&D-intensive sectors improvement, energy-efficient construction grows

Other key trends to watch:

• Energy volatility: Stability in oil markets is trending down. In 2022, oil price changes of over 3% were the norm for three quarters of the year, an unprecedented level of volatility (ICE Brent numbers). Expect more as China reopens, and uneven growth emerges. The upshot is that there may be more motivation for renewables and energy efficiency.

• Logistics: The exceptional growth in logistics of 2022 is unlikely to return; however, new and upgraded logistics facilities are needed to meet shifting trade lanes and demand.

• Green energy/electric vehicle (EV) infrastructure: Geographies that can build renewable energy transmission lines and EV charging networks first would benefit quickly.

• Defense sector growth: Russia’s invasion of Ukraine renewed attention on arms production. Cities and regions with strong defense sectors will likely experience stable growth due to the long-term nature of defense planning.

• The office sector: Office occupiers are navigating work-from-home policies, emerging return-to-work trends and hybrid occupancy scenarios. Vacancy rates in urban core tier-one cities remain at the forefront for all involved in space management, and a growing concern for public authorities in terms of fiscal tax base deficits.