- The global economy is becoming precarious: in the midst of a major slowdown, the risk of recession is increasing. In South Korea, the country seen as a proxy for the health of the global economy, exports have fallen for eight straight months. Japanese exports have suffered a similar fate for the last seven months. A manufacturing recession is also taking hold, with activity contracting in the US, China and Germany. Many worry that global debt is perhaps reaching unsustainable levels (total global debt now amounts to USD246.5 trillion, or 320% of GDP), but this is misleading: in a world of permanently low-interest rates, debt becomes more sustainable (put another way: traditional benchmarks of debt/GDP as predictors of financial crisis no longer apply).
- For years, we’ve argued on this page that lower interest rates are here for the long term. Now there is growing evidence that all major rich economies are progressively turning “Japanese”. As the US economy decelerates or enters recession, the Fed too is likely to slash interest rates – thus ushering the US (like Europe and Japan) into a world of zero bond yields. What happens next? Zero rates will lead policy-makers to enter into MMT (Modern Monetary Theory) new territory. Governments will start implementing expansionary fiscal policies while worrying less than in the past about debt constraints.
- This summer, extreme weather is ubiquitous. Losses and gains are asymmetric and multi-dimensional, but over the next 5 years, the ‘business’ of dealing with extreme weather events (droughts, fires, flooding, unusually high or low temperatures, rising seas, etc.) could yield more than USD 2 trillion in financial revenues. This figure primarily concerns demand for low-emission products and services and hardening of infrastructure for 200+ global companies that responded to a detailed survey – which means that the overall figure is considerably higher. The bottom line: climate change poses a monumental challenge and an existential threat, but transitioning to a low-carbon, more weather-resilient economy is also a tremendous business and investment opportunity.
- That said, actions have yet to catch up with words. There is a striking dissonance between what’s expected (needed) and what’s actually happening. Many financiers haven’t yet priced the cost of climate change, still believing that fears of a “climate Minsky moment” (when extreme climate could brutally re-price assets) are overblown. Central bankers’ and regulators’ concerns are such that much sooner than anticipated those investors who do not think about and act upon the risk of stranded assets could find themselves accused of and liable for not doing their fiduciary duty.
- It is a myth to believe that in the short term the 4th industrial revolution will play out seamlessly. Yes: it will benefit the economy in the long term, but the transition period will be excruciatingly difficult, as it was in past periods of major industrial transition. The 1st industrial revolution did lead to much greater prosperity, but only after decades of pain which saw wealth concentrated in the hands of capital. From 1780 to 1830, technology largely replaced labour and textile worker wages grew by only 12% while productivity soared by about 50%. It won’t be different this time: AI will ultimately do to workers what the steam engine did 250 years ago.
- Understanding the nature and timing of the political and social implications of the above is crucial. 21st century is not the 18th: this time, the anxiety-generating nature of tech (for many people) is compounded by other fears (most notably climate change) and lower tolerance for inequity than in the past. Government use of military force and the long arm of the law to curb worker unrest are thankfully no longer an option. So what comes next and when? To mitigate the risks of turmoil, governments will likely over-react and increasingly interfere in the conduct of business, deciding not to focus on the many benefits of technology, but on its ‘social’ costs. Expect autonomous vehicles, AI assistants and cashier-less stores to take longer to enter the economic stream than we currently commonly assume.
- The idea that populism is global and inevitable (the so-called “populist surge” theory) is being challenged in an unlikely place. New developments in Central and Eastern Europe suggest that a backlash against the (populist) backlash may be in the offing. In Slovakia, Poland, Bulgaria, and half a dozen other countries, new liberal leaders have won against populist candidates (in general or local elections) or serious protests have taken place against populist incumbents. It’s too early to tell whether this is a trend or a blip, but don’t write off liberal values just yet…
- Troubles in Hong Kong are a miniature representation of what’s happening in the broader world of global geopolitics. The territory, once central to China’s ascent and an archetype of globalisation, forms a critical node in China-Western relations that is at risk of vanishing. Often carrying the US flag, the demonstrators clearly want to make their demands part of the broader rivalry that opposes China and the US. The outcome of the growing disorder is unknown, but in an age of de-globalisation, we can be sure that politics will trump economics. Simply put: China won’t make political concessions for fear of economic damage.
- A fast-rising business trend (fuelled by the concentration of wealth): customers willing to pay extravagant amounts of money for supposedly unique goods or services. These range from a $20 cup of single-origin (Yemeni) filter coffee to a $3,100 a night in a cabin (no Internet) in Alaska’s Denali National Park. Businesses tending to these ‘positional’ goods are springing up in various guises all over the world. They constitute a good example of human resourcefulness and the ability to create and exploit a vibrant market out of the simple desire of some for exclusivity.
- Talking about consumption decisions… We are less in charge than we like to think we are because technology using sophisticated algorithms is now capable of manipulating our preferences and driving our decisions. Some pundits call this new phenomenon the “sleepwalking economy”.
- All the above is a mile-wide and an inch deep. For the opposite: a mile deep and an inch wide, real-time, in-depth analysis of any of the bullet points above, and their implications, please contact us and gain access to an unrivalled network.
