Leadership in 2023

Episode #227 transcript

Today is going to just be a bit of fun! I'm going to take a look at what's likely to be ahead for economies, businesses, and leaders in 2023. At the end of each year, I normally spend a bit of time looking at a variety of sources and I come up with a view on a range of possible future outcomes in different areas like business, politics, and society more generally.

And without trying to make any fearless predictions, I like to have some sense of how the world is trending. Remember, trend is your friend. So rather than just making judgments based on a snapshot at any particular point in time, it's much more useful to see which way an issue has been trending historically, when you want to get an idea of where we'll be this time next year.

So today I'm going to just give you a little window into some of my thoughts for what we might be looking forward to in 2023. I use several sources for this. Sources as diverse as The Economist, of course--you know I'm a fan of that--the Wall Street Journal, the Australian Financial Review, Wikipedia (the most reliable website in the world), Harvard Business School and, of course, my favorite future leaning forecasts from the Good Judgement website, which I'll tell you more about shortly.

I'm going to begin with a look at the macro-level economic drivers. I'm then going to pay particular attention to a fabulous lecture I was fortunate to attend at Harvard Business School a couple of months ago; and I'll finish with a lighthearted look at some of the jargon and terminology we're likely to encounter in 2023. So let's get into it.

THE MACRO LEVEL

Now, I just want to put a caveat on this episode: whereas it might seem like I'm offering predictions for 2023, I'm absolutely not. As Eugene Ionesco said, "You can only predict things after they've happened."

But having said that, I'm going to give you my views on some of the trends that I think are emerging. Now, I mentioned the Good Judgement website. This is an organization that uses super forecasters to predict what will happen in areas of geopolitics and economics. And this is a ‘Wisdom of Crowds’ type of thing.

If you haven't come across the concept of The Wisdom of Crowds, it was popularized in a book by James Surowiecki around 20 years ago. The central tenet is that if you take the average of opinions from a large sample of individuals, you're going to end up with a more accurate answer than any individual expert could have predicted on their own.

For example, try guessing how many jellybeans are in a large jar.

If you were to ask a few thousand individuals, with no expertise whatsoever in estimating such things, and then average their responses, you'd end up pretty close to the right answer. And in fact, that average would be closer to being accurate than the guess of any particular expert… say, a physicist who's expert in volumetric calculations of 3D objects.

This is why I like to look at the super forecasters’ predictions in the context of the global macroeconomic picture. So what are a few of their takeaways?

LET’S START WITH CHINA

This is always intensely interesting. Will China's GDP growth return? 85% of forecasters think it's going to grow by between two and 5%, which is phenomenal. And even more than this, almost three quarters of the forecasters think that China's GDP growth is going to be above 3.5%.

Not quite a return to the Halcyon Days of 8% year on year growth, but it still shows strong recovery, nonetheless. And this is going to be an important factor in stimulating global trade.

Of course, there are lots of predictions around the war in Ukraine. Somewhat comfortingly, 95% of people don't think Putin will resort to nuclear weapons in 2023. That's a relief! But unfortunately, 90% of forecasters think that Putin will be able to hold onto power in the Russian Federation.

It's pretty broadly agreed that we'll be heading into a global recession in 2023. And there's a little bit of a Catch 22 here, because central banks are going to be looking to higher interest rates to dampen inflation. But this has consequences which are going to be felt in flattened consumer spending and increased unemployment.

And in Britain in particular, the short but seismic prime ministership of Liz Truss is still having impacts as the country tries to build back some semblance of credibility and trust in the markets.

For six straight years, gross fixed investment, which is a proxy for infrastructure spend, has risen as a share of global GDP to over 25%. This is going to stagnate a bit in 2023, due to lack of government cash. But despite this, global investment will be nearly $25 trillion.

Remember, governments propping up employment and growth can only last for so long. Sooner or later you have to pay the piper. And although I know Margaret Thatcher was a very divisive political figure, she did manage to succinctly articulate the conundrum that faces virtually every government when she said, "The only problem with socialism is that, eventually, you run out of other people's money."

In America, things look a little better than in the UK and Europe. The interest rate hikes that the Fed has committed to will certainly push us into recession, but this is likely to be cushioned by the record low unemployment and strong household savings position when compared to other countries.

AND WHAT ABOUT THE REST OF THE WORLD?

The Gulf countries are absolutely booming. They're some of the few economies actually benefiting from sustained high energy prices. They're also taking on an increasing role as financial entrepôts, or middlemen. Will the Middle East be the next Hong Kong or Singapore? Well, regardless, 2023 is going to be a big year there.

India is also on the rise. In fact, it's on track to overtake China in 2023 as the world's most populous country. And India has a bunch of other factors producing a tailwind for them. It's buying cheap energy from Russia, which is going to fuel economic growth. Domestic investment is on the rise, and the world is increasingly looking to India to replace China as a source of goods production and manufacturing.

For leaders who travel a lot for business, the airline industry is going to rebound, but it still won't get quite back to pre-COVID levels, as many business travelers are going to choose to do business remotely wherever they can.

And of course, energy shortages will persist.

Some of the previously planned closures of fossil fuel generators are already being postponed. Lack of energy security in Europe is at the core of this, and unfortunately it's going to further impact our decarbonization plans.

This is a really, really difficult issue, which demonstrates the complexity of the wicked problem that is global decarbonization. What do governments and businesses do when faced with the specter of either missing the COP27 targets for reducing greenhouse emissions, or meeting those targets while allowing businesses to fail and people to die in a cold European winter?

SOME INSIGHT FROM HARVARD

I had a five-year reunion at Harvard Business School in October just gone. I actually find it really hard to believe it's 15 years since I sat in those rooms, debating the merits of the case studies we'd analyzed. This was not only pre-COVID, it was also pre-global financial crisis.

One lecture in particular was incredibly insightful. It was from professor of international management, Rawi Abdelal. In just a little over an hour, he gave a fantastic overview of the changing world order. So I just want to relate some of the key points that Professor Abdelal made in this lecture.

Interestingly, his view is that we won't return to the global economy: not the one we grew up in professionally, at least. And we don't really know what's coming next.

Without making any rash predictions, he outlined the trends that show the repeat of a well-established cycle. That's the cycle of the rise and fall of great powers. He talked about the share of world GDP that different countries have had at different stages of the last century and a half.

I actually didn't know this, but in 1870, China led the world in share of GDP, with almost 17% of all economic output. India had about 12%, and the US and the UK were both around 9%.

The rise of the US through the turn of the 20th century saw it massively outperform other countries. At its peak in 1960, the US accounted for almost 25% of global GDP, with the next nearest country being Russia at about 10%. The US had unrivaled economic power. By 2016, however, the US share of GDP had fallen to 15% and China had overtaken it with almost 18% of all global GDP. And apart from India at around 7%, no other country had as much as a 5% share of global GDP.

As an aside, these numbers are adjusted for purchasing power parity (PPP): so, in other words, taking into account local pricing factors. If you want to learn more about PPP, have a look at the Big Mac Index. And, yes, I’m talking about a McDonald's Big Mac.

This is just a fun way to talk about the buying power of different countries. It started in 1986 as a tongue-in-cheek proxy to determine a country's purchasing power relative to its currency exchange rate.

The Big Mac is an incredibly consistent product that doesn't vary much from country to country. So when you compare the price difference of a Big Mac in any two countries, with those countries’ exchange rates, you can work out whether their currencies are overvalued or undervalued. It's the equivalent of what economists call a basket of goods, but it's simpler to compile and understand.

But I digress. Let's get back to globalization. One of the most interesting things that Abdelal said is that only 40% of Americans think globalization is a force for good… which means 60% think that globalization isn't good. Just think about that: US citizens no longer believe in the system that the US built!

We've experienced a retreat from globalization in the last several years as we've seen countries become more insular, and this was accelerated by COVID when supply chains were more problematic.

So what's the likelihood of greater global integration going forward? Well, according to Abdelal, it’s extremely low: Less than 10%. What's the likelihood of a similar level of integration to what we've seen in the past? Well, that's pretty unlikely too: Maybe about 30%. And the likelihood that we’re heading into de-integration of the global system has the highest probability by far at around 60%.

I've got to tell you, this is a little disturbing. If you look past the hysterical sensationalism, globalization has been an incredibly positive force for good, lifting living standards all over the world.

Don't get me wrong: there are still vast divisions of wealth, and I don't think any system is ever going to deliver the utopia of global equality. But if you look at the objective facts, it's indisputable that globalization has lifted over 1 billion people out of poverty in the last few decades.

This retreat from globalization comes at a time when countries in Africa and Latin America are best poised to take advantage of the global growth engine, so it would be an absolute tragedy to see them deprived of the opportunity for economic prosperity that much of the developed world has benefited from in the last 50 plus years.

But there's definitely a rising tide of populist backlash against the system: a deep sense of frustration within inequality of income and wealth. It's not exactly new. It's been happening since the 1920s and 1930s, but the populist backlash we're witnessing now all around the world is really telling.

Marine Le Pen was narrowly defeated in her bid to become the president of France. And if it weren't for a few votes, the world order would already look really different, as LePen had clearly stated her intent to withdraw France from the European Union.

Add to that, the microeconomic trend of disaffected labor—so, the great resignation, quite quitting, refusal to return to the office, and so on--and this hotbed of discontent is unlikely to cool in 2023.

Also, sadly, as a consequence of the war in the Ukraine, it's going to be a rough winter in Europe. We can expect energy shortages and, more broadly, as the supply of wheat exports from Russia and the Ukraine remain low, potential famine in poorer regions that can't manage through that price volatility.

Professor Abdelal's conclusion went something like this:

He made it very clear that the populist backlash we're seeing is aimed squarely at… us. Those who are perceived to be the ‘privileged elite’.

I don’t think many Harvard Business School alumni could mount a counter-argument to this one. But, ironically, we're also the ones who are most likely to be in a position to influence how the system works. Whereas we need to do everything we can to preserve globalization, the system definitely needs a rethink.

As leaders, we have an opportunity to be part of that rethinking. In the next five to 10 years, we can make a meaningful difference. Leadership is more important than it's ever been in our lives.

Not the sort of conclusion you'd normally expect to hear from a macroeconomist, right!?

Okay, having said this episode was going to be just a little bit of fun, that was pretty serious and depressing. So let's finish on a lighter note. What's some of the new jargon and language that we're going to see emerging with greater frequency in 2023? I've just picked up half a dozen of these from a variety of sources.

2023 JARGON

The first is resilience hubs.

A resilience hub is the next level up from the concept of a cooling center. A resilience hub is a safe place to go in a heat wave. You can charge your devices or maybe find someone to talk to. Some will provide education and social services, or maybe even help people to find housing or food.

The second expression is battery belt.

A battery belt is a hub for renewable energy developments. In Australia, for example, the best places to harness the wind and sun aren't necessarily the easiest places to get that electricity to market from.

Because of this, renewable energy generation facilities will need to be built in clusters. That way the infrastructure that transports the electricity to where it's actually needed (sometimes hundreds of miles away) is economically viable.

While we're on energy, one term that all corporate leaders are going to need to become familiar with is Scope 3 emissions.

Scope 1 and 2 emissions are greenhouse gasses directly released into the atmosphere by your company as a byproduct of its operations. The concept of Scope 3 emissions goes even a step further than that. This is the calculation of the greenhouse gasses emitted by your customers who use your company's products.

These emissions are going to be attributed back to your company's carbon footprint. In effect, your customers’ Scope 1 emissions are potentially your Scope 3 emissions. Clearly, we can expect a bunch of double counting here.

This concept is a little confusing, so let me give you an example: a coal mining company emits greenhouse gasses from its operations. It operates trucks, draglines, handling and washing plants, and it has to transport the coal to market, of course. But the product they export (the coal itself) isn't counted in the company's direct Scope 1 and 2 emissions. Why not? Well, because that product doesn't create any emissions until it's burnt by the customer.

The steel-making company that buys the coal creates emissions when it burns the coal to manufacture steel. These are counted as Scope 3 emissions, and attributed back to the coal miner because its product eventually creates greenhouse gasses. Unfortunately, all the accounting and measurement in the world doesn't help as long as the coal and oil is still being burnt to produce reliable, affordable energy.

The fourth term I love is Passkeys.

Just when I thought I was getting on top of all my passwords, and I'd learned how to use a password manager to prop up my ailing memory, passkeys are the next generation of digital security. They go beyond passwords: a new, more secure method of protection for your systems and data. A passkey is an automatically generated token that's stored on your device. It can't be guessed or forgotten and it's protected by a biometric authorization, like a fingerprint or facial recognition.

Term number five is productivity paranoia.

We're all becoming very familiar with this term. According to The Economist, 87% of employees think that they're at least as productive at home as they are in the office. But more importantly, only 12% of their bosses agree.

This leads to paranoia on both sides of the equation. Bosses are paranoid that people aren't working as they should and workers are paranoid about showing that they are actually contributing fully.

Which leads to the final piece of jargon, productivity theater.

This is where workers go out of their way to demonstrate that they're actually pulling their weight. They indulge in performative work that's designed to prove their commitment and productivity rather than to actually achieve the objective of the work itself.

2022 definitely had its challenges, but I think it was an awesome year. We emerged from the pandemic and started to reshape what the new world of work and leadership looks like.

We’re much wiser now than we were before we went into the pandemic, and we now get to lead our organizations with a newfound optimism. There are still heaps of reasons to be nervous, apprehensive, and negative, right? But think about this: what if you made 2023 all about steering your people to the opportunities that abound in our post COVID world? What if you could help them to unlock their own creativity and experience to win in a world that's still changing rapidly? That sounds like an exciting 2023 challenge to me!

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