After the shocks of 2022, a recession for large parts of the world in 2023 seems inevitable. More difficult is to assess the long-term impact of reversing the assumptions that have underpinned global economic history for more than 30 years.

Abundant and cheap labor, low energy and transportation costs, and a generally peaceful geopolitical era have all helped to energize the globalization of supply chains and drive growth. Central bankers massively injected liquidity into the global economy whenever one of these pillars wavered. For the past ten years, rates have been close to zero and certainly well below the inflation rate.

In less than three years, the world has changed. Labor costs have risen sharply, and global energy costs have exploded. Energy prices jumped 50% in 2022 alone. Protectionist measures have flourished between different blocs, including between Europe and North America. War came to Europe with Russia’s invasion of Ukraine, and President Vladimir Putin and President Xi Jinping openly challenged the post-Cold War order and Western liberal values.

The most worrying consequence of all these shocks has been the return of inflation. It is not only the magnitude of change that is historical but also the pace.

The central banks ignored the first embers, then acted as they had never done. More than 90 central banks raised interest rates in the spring and summer of 2022. This will dramatically affect long-term borrowing costs for businesses, consumers, and governments.

Will economies continue to grow as interest rates and unemployment rise and real incomes and house prices fall? The financial crises in Mexico and emerging economies in Asia after the United States began raising interest rates in the mid-1990s showed that even a soft landing in the United States could cause a crisis in other parts of the world, especially when accompanied by a strong dollar. The recent resurgence of optimism should not make us forget these new paradigms, which are here to stay.