George Kerevan: 2023, also known as the Armageddon waiting room

What can we expect economically and politically in the coming 12 months?

On the economic front, we may avoid Armageddon. The last few months of the old year saw some positive developments. For one thing, the exchange rate of the US dollar started to fall, on the prospect that inflation is moderating and with it the chances of ruinously high American interest rates.

The dollar is still over-valued but at least it is coming down. That means other countries don’t have to jack up their interest rates to protect their own currencies, and lower than expected interest rates in 2023 means any recession will be shallower and shorter-lived.

The usual caveats apply. If the Russo-Ukraine war intensifies, if China invades Taiwan, if central banks make big mistakes, then all bets are off. And no-one is suggesting the industrial West can avoid an economic slowdown.

But (fingers-crossed) the economic outlook is looking marginally better than it did three months ago. There’s even been some good luck: the mild winter in Europe has eased the problem of replacing Russian gas, so no power-outs just yet.

That said, the British economy continues to underperform compared to the other big economies in Europe and North America. Historically, Britain has pursued a peculiar energy strategy based on importing cheap gas at spot (market) prices yet building no gas reserves or extensive storage facilities to get buy if those imports become scarce or expensive.

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With the loss of Russian gas sending prices into orbit, this strategy has imploded, forcing the government to provide massive and unsustainable subsidies to industry. Even though wholesale gas prices have started to fall as a result of America supplying more fracked gas, and consumers cutting back on power demand, the UK will still face high energy prices throughout 2023. And when did the energy companies ever pass on a fall in wholesale prices to the customer?

There is another broken bit of the British economic accumulation model. We rely on rising house prices to underpin consumer borrowing and spending. But higher interest rates courtesy of the Bank of England, coupled with Britain’s unique reliance on variable rate mortgages, will likely trigger a crisis in household debt in 2023.

In addition, the UK is suffering a peculiar stasis in productivity, the result of its speculative, rentier classes focusing on property and financial speculation rather than manufacturing.

As a result, the Office for Budget Responsibility is predicting the UK economy will be in recession till the last quarter of 2023, that output will fall by 2 percentage points (a lot), and that unemployment will rise by half a million.

On the upside, the OBR predicts that the inflation rate will moderate substantially and the following year, 2024, will see a return to growth and rising income levels.

Of course, the British authorities have systematically underplayed inflation since 2021, so remember that this is just an educated guess, not something set in stone.

The wild card here is wage demands. UK living standards have been battered by inflation and tax rises. Real household disposable income per person (a good measure of living standards) is set to fall by 4.3% this fiscal year – the largest drop since records began in 1956. This will be followed in 2023-24 by another 2.8% drop.

Even in 2028, living standards are forecast to still be below pre-pandemic levels. No wonder there are strikes. This year will be defined politically by the willingness, or not, of the Sunak government to resist pay demands, especially in the public sector.

I confess to being on the side of the workers. We should reject the logic that says public-sector wage increases lead to private sector inflation. The reverse is true: higher wages in the state sector feed through to greater consumer demand.

The main leakage from domestic spending is to the financial sector through higher interest rates and higher government debt repayment (heading for 8% of public spending).

The weak spot in the economy is not wage demands but bank lending. UK bank-to-business lending is forecast to drop by 3.5% in 2023 which seems a good deal more worrying than paying nurses and teachers a bit more.

Which brings us to the political sphere. This year is peculiar in Scotland for not having any sort of elections and we can safely say there won’t be an independence referendum in October. What will Scottish political activists and politicians get up to with all that time on their hands?

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The same does not apply elsewhere in the UK. There are local elections in England on May 4 and in Northern Ireland on May 18.

There’s still no sign of a fresh election to Stormont, but that could conceivably come.

Elsewhere there are national elections in a clutch of African countries, including populous Nigeria; the US has gubernatorial and Senate elections; Asian nations going to the polls include Bangladesh and Pakistan, both flashpoints; and in Europe we will see electoral contests in Poland, Finland and Estonia – all bordering Russia.

You’ll have to wait till 2024 to see the electoral fireworks in the US, UK, Russia, Ukraine and EU.

However, the Ukraine conflict will continue, meaning that normal political service is suspended everywhere. The decision last week by America, France and Germany to supply Ukraine with light tanks – clearly an offensive weapon – represents a significant upping of the stakes regarding Western involvement in the conflict.

But the real decider is economic. Russia is a middle-size economy that will find it difficult to sustain a protracted proxy conflict with Nato. Will anyone blink in 2023?

Yet desperate as is the Russo-Ukraine war, the fulcrum of global politics rests on the Sino-American battle for influence and markets.

This battle of the behemoths will define 2023. This economic war began in 2018 when President Trump imposed stiff tariffs on imported Chinese goods.

But the trade war escalated dramatically following the passing of President Biden’s CHIPS for America legislation last August. This effectively bans western companies investing further in Chinese high tech and offers billions in state subsidy for manufacturing semiconductors in the continental US. Europe and the UK have been left on the side of the pitch.

Here in Scotland, politics seems to have ground to a halt after a decade of nationalist fervour. With no referendum, and with no elections in prospect to act as a surrogate, the national movement looks stalled.

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In this political lacuna, the call for some sort of national convention to put heart and direction into the independence fight looks appealing. But somehow, I doubt if the SNP leadership wants to risk its political hegemony over the movement.

Finally, will 2023 be the year we breech the infamous 1.5C temperature rise over pre-industrial levels? It’s possible as a one-off.

More likely we will pass that infamous barrier on a permanent basis nearer 2030.

And that’s 2023 folks: less Armageddon, more like its waiting room. Not the end of life as we know it, but a further gradual slide into crisis. Happy new year all!