The post pandemic recovery is both slower and more asymmetric than anticipated. There are more structural reasons for the ‘shortage economy’ than originally thought. Without major investment in renewables the global energy market will be unbalanced. Transient inflation looks here to stay – employees are not. The great re-evaluation persists, with an altered mindset in relation to work. Effectively combatting climate change will require a radical change in our collective mindset. More radical activism and climate change litigation will call out the laggards
  • The continued supply shock (disruptions will last well into 2022) and lingering concerns over Covid infection rates are slowing global economic growth. In the US, these just cut the Summer rebound by half (+2% GDP growth in Q3 on an annualised basis). In Q4, in all systemically important countries, this tepid economic recovery will continue to disappoint with growth estimates being revised downwards(like from 3.5 to 2.6% Y-o-Y for 2021 in Germany).
  • The asymmetric nature of the recovery is a major concern, as the pandemic affects the weakest countries and the poorest people the most. This occurs in two ways. (1) Globally, inflation is reducing real incomes, thus hitting the less privileged the hardest. (2) We are entering a two-speed global economy: rich countries’ economies + China will return to their pre-pandemic level in early 2022, while the rest of the world will remain below trend until 2025.
  • The “Shortage Economy” may be more structural in nature than it seems. The current mismatch between supply (constrained) and demand (expanding) results from the pandemic and the associated monetary and fiscal policies designed to alleviate its impact. But there is more. (1) Rising protectionism and the reining in of unfettered globalisation are leading to a shortening of supply chains (with ‘just-in-case’ replacing ‘just-in-time’). (2) Transitioning to green energy also has an important impact.
  • The latter is leading to a spike in energy prices exacerbated by (1) extreme-weather event risks, (2) geopolitical squabbles and (3) labour shortages. The crux of the issue is this: a mismatch between investment in renewables that remains wholly inadequate and slumping investment in oil & gas (that still accounts for 83% of global primary energy demand). The IEA estimates that unless investment in clean energy triples in the next ten years, the global energy market will remain unbalanced. Expect continued energy price volatility and violent swings.
  • All the above suggests that the ‘mild stagflation’ scenario that we anticipated last month is gaining ground. Monetary policy is ill-suited to respond to supply-shock generated inflation, but there is burgeoning evidence that wage pressure is also becoming an inflation concern in high-income countries. It could generate a wage-price spiral – the ‘nightmare’ of central bankers. As the bullet point below demonstrates, the current transient inflation spike is likely to prove both greater and longer-lived than initially expected.
  • The “Great Resignation” equates in fact to a “Great Re-Evaluation” and it will persist. Pandemics favour introspection and Covid-19 has triggered a general re-assessment of what matters in life. A recent global report conducted in five countries as different as the US and Singapore concludes that 40% of employees are likely to quit their job within the next six months, with two-thirds willing to do so even without a new one to go to. This affects all industries but hits particularly hard those that suffer from an image problem (like oil & gas, hospitality, manufacturing, and transportation). Businesses which believe that the problem can be fixed simply by pay increases have got it wrong. Good pay rates do matter in so far as they prevent dissatisfaction. Satisfaction, however, only comes with purpose, especially for the young generations.
  • This may explain why in the rich world, as working from home becomes the norm, “remote-first” is gaining the upper hand. In February 2020, 5% of all US working hours were spent at home. This soared to 60% in May 2020 (during the lockdowns) and is now at 40%. Figures are similar elsewhere, and most experts expect that in the future we’ll work from home for at least one to two days a week. Over recent months, the assertions of those exhorting us not to do so, like banks and governments, are less and less vehement. Working partially in a remote manner is inevitable for two reasons: (1) Workers want it (an obligation to be back full-time in the office is perceived as the equivalent of a 5%+ salary cut.) (2) In the plethora of research on the subject, a consensus is emerging that working from home has a positive impact on productivity. Companies will also benefit from decreased overheads, and those who don’t catch the “remote-first” trend will lose talent.
  • COP26 will show that the aspiration of 7bn+ of us living comfortably and harmoniously together is just a dream. Tackling climate change in earnest will require both (1) ambitious policy measures (with a proper carbon-pricing regime to begin with) and (2) a radical change in our collective mindset. The bottom line: if we want to avoid a climate catastrophe, we must cut emissions at a much faster rate than committed to so far, at the country, industry, company, and personal levels.
  • What are some of the consequences for investors and business executives? In no particular order: (1) Rising and more radical social and investor activism against ‘carbon-culprits’ – the greater the threat of climate change, the more emboldened activists become; (2) A stronger focus on greenwashing: the innumerable pledges and commitments to net 0 will be scrutinised and monitored by armies of agencies and analysts; (3) An acceleration of climate change litigation (they’ve doubled since 2015) and their associated media campaigns like #SeeYouinCourt; (4) A concerted global effort to put a monetary value on natural capital, with companies being forced to protect so-called ecosystem services; (5) more geopolitical tensions.
  • Tech is a potent source of innovation and progress, but it also has a much darker side: the constant expansion of surveillance. In the US, 60 per cent of large employers now track and monitor their workers, a trend expected to grow (Gartner). Similarly, Amazon’s new home patrolling robot (Astro) poses acute privacy risks. By marrying sensors and cameras with AI and databases, it makes our homes the functional equivalent of China’s smart cities. The trade-off between convenience and privacy is a tough one.
  • For an in-depth proprietary analysis of any of the bullet points and what they mean for you – please contact us. We provide tailor-made, independent research, with insights and actionable ideas based on a rich and diverse network. Hence, we avoid (1) groupthink and (2) off-the-shelf solutions. Details HERE