Glimmers of light in a terrible year

Few will regret the passing of 2022. It has seen a brutal onslaught on a peaceful neighbor by a vile despot. It has seen soaring inflation and falling real incomes in a global cost of living crisis. It has seen rising interest rates, a strong dollar and widespread difficulties over debt: according to the IMF, 60 per cent of low-income countries are in debt distress or at high risk of being so.

It has seen falling asset prices and heightened volatility in markets. It has seen important moves towards uncoupling between the US and China and the formation of competing blocs centered on the two superpowers, with Russia firmly in China’s camp. It has seen the failure of the COP27 conference to bend the curve of emissions of greenhouse gases downwards. It has not even seen full recovery from the dire outcomes of the Covid pandemic, especially among the world’s poorest people.

This is bad. Worse may still be to come, possibly even much worse. Vladimir Putin, in particular, is an unknown quantity. So, too, as we have seen over his policy towards Covid, is Xi Jinping. Who knows what financial mayhem the Republicans might unleash over the US debt ceiling in 2023? Again, will the EU really stay the course on Ukraine as interest rates rise, economies fall into recession and debt distress increases?

Yet it is not all bad. In 2022, light also shone in the gloom. Let us celebrate this before we plunge into a new year.

Line chart of Responses to poll question, 'In hindsight, do you think Britain was right or wrong to vote to leave the EU?'  (%) showing The British public feels 'Bregret'

The west is back. The invasion of Ukraine has brought those who share democratic values ​​together. For the Nato alliance, it was a time of rebirth. For Germany, it was a Zeitenwende. For Finland and Sweden, it was time to reject neutrality. Donald Trump’s fawning over Putin failed to undermine US support for Ukraine. Volodymyr Zelenskyy won the propaganda war, hands down. He is the heroic leader Ukraine — and the west — so desperately needed.

Line chart of CBOE Vix index of US stock market volatility showing US stock market volatility has been relatively high in 2022

Putin is not the only strongman to look weaker today than a year ago. So, too, do Xi and Trump. The former’s zero-Covid policy has ended in ignominy. The claim of today’s version of ancient Chinese despotism to rule more competently than messy democracy lies in tatters. Iran’s despots are under assault from their young. Trump’s candidates were substantially repudiated in the midterm elections. Yes, he has vastly too many supporters for comfort. The Republican elite remains craven. But Congress has now made his attempted insurrection as plain as day.

Meanwhile, in battered Britain, the value of democracy has also been proven. Moved by fears of electoral defeat, the Conservatives ditched Boris Johnson, followed by the staggeringly incompetent Liz Truss in 44 days. No one died. Democracy is not perfect, especially when it takes the form of referendums on topics the people cannot be expected to understand in full. But they do learn: a recent YouGov poll shows 51 per cent regretting Brexit and a mother 34 per cent still supporting it. This shift will allow a future government to bring the UK closer to the EU again.

Line chart of Cyclically adjusted price-earnings ratio on US stock market showing The valuation of the US stock market has fallen but is still high

Too late, but with determination, the Federal Reserve has acted to bring domestic inflationary pressures under control in the US, where they were strongest. Partly as a result, inflation expectations remain under control. Bread is still to come. But the chances are good that inflation will be brought under control in the US and elsewhere in 2023. A return to growth should follow.

Rising nominal and real interest rates have shaken the markets. The cyclically adjusted price/earnings ratio in the S&P 500 has fallen from 39 in December 2021, the second-highest peak in history, to a recent low of 27. That is still far above the long-term average of 17. But it is a move towards reality. Markets have also become noticeably more volatile and some speculative assets have tumbled badly. Bitcoin is down from a peak of $69,000 last year to $17,000. This proves that it is neither a unit of account nor a store of value. It has never been a useful means of payment. As went Bitcoin, so went Sam Bankman-Fried’s FTX. Interest rates may not stay high in real or nominal terms. But their jumps have reminded investors of risk. Good.

Line chart of US $000s per Bitcoin showing Bitcoin has suffered an enormous loss of value in 2022

Globalization is also not dead. Indeed, outside the US, where whining about unfair trade has become almost epidemic, most countries understand that they need buoyant trade to thrive. Encouragingly, the IMF forecasts the volume of world trade in goods and services to rise by 4.3 per cent this year. Interestingly, this is faster than the 2.9 per cent growth in trade in goods: trade in services is taking the lead. This follows 10.1 per cent growth in the volume of trade in goods and services and 10.8 per cent growth in trade in goods in 2021. Meanwhile, global gross domestic product is forecast to grow only 3.2 per cent in 2022, after 6 per cent in 2021 .

So, the world is not deglobalising: trade is just not growing as fast as before. That is in part a natural development. Globalization could not grow as fast as before. But it is still at work. The world economy also continues to grow. Our ancestors would find this extraordinary.

Column chart of Growth in global GDP and trade (annual % change) showing World trade is still growing along with output, just not much faster

Finally, in a messy and ill-co-ordinated way the world is leaving Covid behind. This is greatly helped by the vaccines, even though these are not as widely distributed as they should be. Worse variants are likely and new pandemics probable. But this is progress.

It is easy to be overwhelmed by the dangers, injustices, conflicts and failures of our world. Surely, enough of them exist. But not all that happened this year was a disaster. For those of us who believe in democracy, the rule of law, continued economic advance, global economic integration, sound financial markets and monetary stability, 2022 was not entirely bad. Yet let us hope that 2023 is better. It needs to be.

martin.wolf@ft.com

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