This Week in The Lens

The Lens is FrontierView’s weekly newsletter published by our Global Economics and Scenarios team. Each week, The Lens features easily digestible content that dives into the business implications of macroeconomics on the market today.

Economic and geopolitical trends and insights from FrontierView’s Global Economics and Research team
__________________________________________________________________________________________________________________

All year, FrontierView’s Research team has been laser-focused on the  US Federal Reserve . While the minutiae around the Fed’s interest rate setting decisions and bond selloffs don’t always have a clear direct impact on day-to-day business, the broad strokes tell us everything about the overall economic environment and the balance of risks. 

Since March, the Fed has orchestrated the fastest tightening in monetary conditions since the 1980 Volcker shock – when the Fed purposely caused a recession to bring down inflation. It’s hard to see how such a swift credit drawdown doesn’t create some kind of stress, somewhere. Warren Buffet once quipped, “You only find out who is swimming naked when the tide goes out.” After more than a decade of near-zero interest rates, the tide of cheap credit is finally ebbing. So, who’s going to be left exposed?

One area to look to is residential property markets. The concerns here are serious enough to warrant inclusion in our  Events to Watch for 2023  report as a key risk to the global outlook. For years, house prices around the world – especially in cities and in advanced economies – have climbed higher and higher. During the pandemic, work-from-home needs and a jump in household savings drove a homebuying frenzy that sent prices soaring. Now, mortgage rates are up by hundreds of basis points in many markets, and households with high debt levels on variable rate mortgages can’t make those monthly payments. Strains are beginning to show in  Canada Sweden , and  South Korea . At a minimum, expect to see a downturn in consumer spending and greater price sensitivity, as income gets redirected to debt repayments. Tight housing supply should keep a floor under house prices, meaning that  should be the worst of it.

But if there’s anything we should have learned from 2022, it’s the value of anticipating how things could go wrong. A broader housing downturn, banking crisis, and consumption collapse is something to prepare for – and  Events to Watch  tells you how to do it.

Elizabeth Rust
Senior Analyst in Research 

Our  Events to Watch for 2023  report is now live! This annual report highlights high-impact, medium-probability events that could torpedo your business plans next year. After a year of extreme volatility driven by a series of shocking developments – including several that were anticipated in last year’s report – many executives are putting contingency planning at the top of their agendas. We recommend making Events to Watch the starting point for that process.

Open the report, and you’ll immediately notice three of the nine “global” events we’ve flagged are all about China. That fact not only reflects China’s size and influence in the global economy – a country accounting for a fifth of world GDP, and at least a third of global growth. It also reflects the extreme uncertainty around China’s policy outlook following the 20th Party Congress and amid Xi Jinping’s strengthening grip on power. And it stems from how large China looms in company portfolios. China has been  the place to capture revenue growth the last few years. Not surprisingly, our clients – across every industry, region, and function – ask us constantly about  where China is headed  in the next few years.

Not only is the outlook for China uncertain – but the details are changing constantly. A couple of weeks ago, rumors circulated about an imminent end to China’s zero-COVID policy. Now, four major Chinese cities are  facing another round of draconian lockdowns . That’s no surprise to our China analysts, who emphasize that China will be sticking with zero-COVID for the foreseeable future. But the day-to-day policy shifts underscore the uncertain outlook – and the need to prepare for variety of macroeconomic and geopolitical scenarios.

Elizabeth Rust
Senior Analyst in Research 

A lot of executives had their fingers burnt in 2022. Think back to this time last year: COVID-19 restrictions were lifting, consumer activity was picking up, travel was getting easier, businesses were moving beyond pandemic crisis mode and engaging in confident longer-term planning. Sure, there were some signs of trouble: energy prices were picking up, inflation readings kept coming in higher than expected, the Fed was starting to hint it  might need to raise interest rates in a few months. Satellite images started showing a buildup of Russian forces near the Ukraine border – military exercises, most likely. But the pandemic era looked to be ending soon, and it was difficult to imagine anything more disruptive than what we’d already lived through.

Then, events happened. South Africa announced discovery of the Omicron variant on November 24, and travel barriers got reinstated. This didn’t ruin businesses’ 2022 plans, but it did set back the recovery by a few months. In December, the  Federal Reserve  announced it no longer believed inflation was “transitory”; by March,  aggressive monetary tightening  was underway. On February 24,  Russia invaded Ukraine Commodity prices  surged, inflation went higher and higher, and growth expectations sank lower and lower. These events redefined the macro environment for the rest of the year.

Events like this are shocking – but many can be anticipated. Last November, we published our annual  Events to Watch report , highlighting medium-probability, high-impact events that could disrupt business plans in 2022. Of the nine events we identified, four of them occurred almost exactly as we described – and three other events occurred partially. That kind of track record means our forthcoming Events to Watch for 2023 report, to be released next week, should be the starting point for your scenario planning for next year.

Elizabeth Rust
Senior Analyst in Research 

Results of the US midterm elections are rolling in. Though some votes have left to be counted, it’s already clear that predictions of a “red wave” were overblown. Republicans have taken the House of Representatives and Democrats will likely keep the Senate – all told, not a bad result for the party holding the White House, who in recent years has almost always been dealt a midterm shellacking. 

Still, a divided legislature will bring an end to Biden’s sweeping economic agenda – which saw passage of major spending legislation including the CHIPS Act, Inflation Reduction Act, and infrastructure law. We’re back to business as usual in Washington – gridlock and investigations. For business, that likely means fewer B2G opportunities and more activity on the  foreign policy  front – the main area where Biden will continue to govern unencumbered.

Elections aren’t the only area of US policy that’s seen a dramatic shift in the last week. Recent actions by the Federal Reserve will likely have an even bigger impact on the business environment in the next couple of years. That’s a theme behind this week’s Lens, which features analysis of what the latest Fed meetings tell us about  where interest rates are going  and what that means for the world. Fed policy is a major factor driving a host of other dynamics – from  European Central Bank policy, to  Mexico’s growth outlook , to foreign exchange trends.

Elizabeth Rust
Senior Analyst in Research 

It’s budget season – not just for multinationals, but also for governments around the world. In government budget drafts released so far, we’re seeing the clear implications of the macroeconomic disruptions countries have faced so far this year. Some markets – already facing rising debt servicing costs, pressure to provide support to consumers and businesses, and lower growth – are under pressure to  make cuts  or even get  international support

Even commodity exporters and markets that have been relatively insulated from the worst of the energy-cost hit are being cautious – whether you look at the likes of  Australia ,  South Africa UAE Nigeria , or even  Saudi Arabia . Multinationals selling to governments are likely to face some price sensitivity and cautious procurement as countries are wary of committing to large-scale spending increases in the face of a global recession, rising interest rates, and geopolitical uncertainty. 

This is quite a different environment to the peak of the global pandemic, which saw rock-bottom borrowing costs support large-scale public-sector spending to shield economies from the worst effects of COVID-19. With governments unable to match that support, we will see a more gradual recovery from this recession than the bounce-back of 2021; we also expect rising political risk as populations grow disillusioned with political leaders — both critical considerations for multinationals’ own plans and budgets for 2023. 

Elizabeth Rust
Senior Analyst in Research 

Expect weaker demand into H1 2023, but opportunities in the market are still there Turkey’s GDP grew 3.9% YOY, while contracting 0.1% on a quarterly basis in Q3 2022. These figures indicate a slowdown in the Turkish economy, which will continue into early 2023 and which […]
Additional weakening of Southeast Asian currencies will drive import costs even higher in 2023 Companies in ASEAN should plan to continue operating in a high-cost environment in 2023, as additional weakening across regional currencies drives import costs even higher. Firms should expect price pressures to be […]
The tax increases come as Colombia’s economy slows substantially amid high inflation and rising price sensitivity, hindering firms’ ability to pass the costs to customers through price increases In November, the Colombian government approved a new tax reform that raises tax burdens primarily on firms and […]

About the Author

Elizabeth Rust

Elizabeth Rust is FrontierView’s Senior Analyst for Global Economics. She specializes in helping clients understand the key drivers impacting the global economy including energy, commodities, US monetary and fiscal policy and other macro and geopolitical factors. Prior to joining FrontierView, Elizabeth was Senior Economist at Keybridge LLC, an economic advisory firm based in Washington, DC. She also served as the 2018 Europe Fellow with Young Professionals in Foreign Policy and as a researcher with the Conference Board in Brussels. She holds a master’s degree in international economics from Johns Hopkins University (SAIS) and a bachelor’s degree, magna cum laude, from Cornell University. 

Subscribe to The Lens