• Global economic growth remains robust, but it is levelling off. In systemically important countries like Japan or regions like the Eurozone, 2018 won’t be as good as in 2017. At the recent IMF/World Bank meeting, the cognitive dissonance between policy-makers and the financial markets was striking. This can be largely explained by differing time-horizons: very short for the markets, longer for all the others. Maurice Obstfeld, the IMF chief economist, said: “The present good times will not last for long”.What are the two main concerns? (1) Trade frictions and (2) Rising over-indebtedness.
  • The US Congressional Budget Office expects the American budget deficit to reach $804bn this year and to exceed $1tr per year as of 2020. The US is an extreme case for not wanting to reduce its deficit, but the whole world is over-indebted. The world’s total debt amounts to $164tr, or 225% of global GDP – 12 percentage points higher than at the onset of the great financial crisis 10 years ago. This is unsustainable. Not only excessive indebtedness acts as a brake on growth, but an abrupt deleveraging in the private sector could trigger a major crisis.
  • Emmanuel Macron (the French President), Madeleine Albright (the former US Secretary of State), and an increasing number of people in the Monthly Barometer’s network are sounding the alarm about rising nationalism and possibly the resurgence of fascism. Indeed: an increasing number of leaders, in Europe and elsewhere, are flirting, if not embracing, illiberal ideas. In many places, xenophobia, disdain for international cooperation and the rule of law, contempt for openness are slowly but surely becoming the norm. For global business executives and investors, operating abroad will become tougher and tougher.
  • Technology increases the skill sets required to find a job at the high-end of the labour market curve and lowers them at the low-end. This, in turn, contracts the pool of potential workers at the high-end and expands it at the low-end, boosting wage growth for a few and constraining it for the majority. This inevitable rise in inequalities is the causal link that leads from automation to populism. It suggests that the countries best placed to fight the populism bug (even if none is immune)are those with a robust social safety net. Seen through this lens, higher taxes, including the inevitable wealth tax, are a small price to pay…
  • Future of work – continued… All careers are elongating with ageing -very soon a duration of 80 years+ will be the norm and for those born today probably 100 years. How can we best prepare for a centennial career? With the 4th Industrial Revolution continuing to engulf the world, skills will become more important than knowledge. Lifelong learning and the on-going acquisition of the ‘right’ skills are the only adequate response. New research identifies those skills that will matter the most in tomorrow’s world as learning strategies, judgment and decision-making, critical thinking, social perceptiveness, fluency of ideas (all exclusively but not universally human). This will progressively change the way in which we look at investment opportunities: college degrees will become imperfect proxies for employability; attitudinal traits such as active listening will represent a growing asset.
  • It is striking that tourism doesn’t get more attention among policy-makers. With the exception of some countries like Argentina, Rwanda, or Portugal, few pursue an active travel and tourism policy. Yet the industry contributes around 10% of total jobs and global GDP. Most importantly, it is growing much faster than GDP in many countries where it has the potential to partly fix the issues of migration and populism. How? On the supply side, by creating a multitude of jobs that are anchored in the local community and on the demand side by opening our minds. As Mark Twain put it: “Travel is fatal to prejudice, bigotry, and narrow-mindedness”. An area of interest for investors: sustainable tourism, which preserves the quality of tourism assets without borrowing from the future. A plethora of start-ups is fuelling this boom.
  • The assumption that low-income countries and regions like India or sub-Saharan Africa will grow much faster than others may prove to be wrong. Three major global challenges will prevent the“late convergers” from realizing their potential: (1) populism, (2)automation, and (3) climate change. All three conflate with each other, scaling their problems. Populism will constrain exports (currently growing at 20%+ in low-income countries, thus paving the way for convergence). At the same time, while climate change depresses agricultural yields, farmers will be unable to move to more productive activities that require higher skills and that are, in turn, losing jobs to automation.
  • A current exception bears important lessons for investors. Bangladesh has become an incredible economic success story, evolving from a “basket case” to an aspiring “tiger” economy status without many of them noticing. For years, it has grown faster than Pakistan and is now overtaking India’s growth as well. This amazing performance can largely be explained by two elements often underestimated by economists: economic inclusion and empowerment of women. As history shows, a reversal in terms of openness, in particular discrimination against minorities and women, would bring this miracle to an end.
  • So far, geopolitics has had a muted effect on the financial markets. This won’t last forever because of the geopolitical background to global economic growth: the rising superpower (China) is challenging the incumbent (the US) who’s turning against the very system it put into place. This cannot be good for stability. Going forward, there’ll be numerous examples of countries like Pakistan who quit the US embrace to throw themselves into the arms of China. The stability of the last 30 years might well prove to have been a historic aberration.
  • In Q2 and Q3 2018, top “must-watch” issues include: (1) Checking whether the current deceleration in economic leading indicators is just a blip or is more structural in nature; (2)Whether the current US-Sino tit-for-tat might evolve into a fully-fledged trade war (probably not); (3) Whether the 10y Treasury yield will continue climbing above the 3% benchmark; (4) The vast array of geopolitical risks with a focus on the Iran deal and the Korean peninsula – we can’t know where the recent agreement to formally end the war will lead, but it is an indisputable positive in so far as it makes US military pre-emption impossible. For real-time/in-depth analysis of any of these, please contact us.