The Global Economy is facing “a confluence of calamities”. Inflation anxiety is being displaced by the spectre of recession. There is no end in view for the war in Ukraine. Meanwhile, it is distracting vital attention from the ever worsening climate crisis. The efficiency premium of autocracies now looks dubious. China is facing its own spectre of zero growth. Culture wars claim their latest victim – ESG. For cryptos, double or quits is the name of today’s game.
- As the IMF managing director, Kristalina Georgieva, just put it: the global economy is facing “a confluence of calamities.” The three main engines that drive it are sputtering simultaneously. In the EU because of the war and the supply shock inflicted by commodity prices. In China because of its inflexible covid policy and the harm this causes to activity and supply chains. In the US because of sharply tightening financial conditions. The fallout from this calamitous combination of (1) The war, (2) the pandemic and (3) the rising rates will cause the most suffering in middle-income and developing countries but there will also be knock on effects in high-income countries.
- High inflation at 8.3% in the US, 7.5% in the EU and 9.1% in the UK (all at end April, Y-o-Y) has triggered a major cost of living crisis. This is particularly acute in the UK. The current situation is one in which (1) price increases are outstripping salary gains (there is no wage-price spiral, even in the US with its ‘hot’ labour market), and (2) those on the lowest income are hit the hardest (in the UK, headline inflation is 10.2% for the poorest decile of households). This poses a severe political risk at a time when governments are already grappling with multiple thorny issues.
- Public concerns about inflation are widespread but the Fed is on it! It won’t blink – so say the market and survey data that show breakeven rates coming down and no hint that inflation is becoming entrenched. This suggests that inflation concerns are receding while recession concerns are mounting. There is little to indicate that the world economy can escape a recession in the coming two years. The only argument that the diehard optimists are proposing is: “if the war in Ukraine stops tomorrow, we’ll avoid a global recession”. That’s as maybe, but the chances that the war in Ukraine will cease tomorrow are zero.
- Neither Russia nor Ukraine is winning the war, and all the indicators point to a protracted war of attrition. As yet there is no clear endgame for Ukraine, with heated discussions among NATO countries and pundits about the possible outcomes. Some think that Ukraine should cede territory to Russia to end the fighting. Others argue that doing so for a deal now will simply set up another conflict later. The Ukrainian authorities concur with the latter and are (for the moment) adamant that no territory should be conceded, believing that offering Putin a face-saving compromise would only enable future aggression. The EU countries closer to Russia agree. Continuous instability is to be expected for the foreseeable future as (1) The war won’t end until Putin disappears; (2) Time plays into Putin’s favour.
- Russia’s war in Ukraine and fears of an impending recession mean that concerns about environmental degradation and accelerating climate change have taken a back seat, both in terms of political priority and media attention. Yet, the litany of bad to catastrophic news goes on, including last month insufferable heat in India and Pakistan and extreme drought in the Horn of Africa. The inadequacy of current climate action is ever-more alarming and will trigger a plethora of diverse responses. These range from (1) an exponential rise in investment in new ‘big solutions’ like carbon capture technologies and regenerative agriculture (soil is a critical asset); to (2) a sharp, multifaceted, rise in activism – spanning from an ‘explosion’ of litigation cases to ‘green’ violence that will disrupt carbon-emitting incumbents.
- As of late, the ‘balance of power’ between democracies and autocracies seems to have shifted. The efficiency premium attributed to the latter is now very much in doubt. Democracies may be facing a crisis, but autocracies are confronting an even bigger one. Russia of course, but also China, Turkey or Ethiopia are each embroiled in their own set of problems caused by inflexible governance issues and the absence of checks and balances. By contrast, Western democracies have responded to a series of acute crises (the pandemic, the war) with speed and nimbleness. The EU is much more resilient than its detractors would have us believe. As is often the case, complex and challenging endeavours only show their true worth in a crisis.
- Last week, Chinese Premier Li warned that China may experience zero economic growth this quarter. As the hope of rebalancing growth towards consumption and business investment is fading, it is hard to envisage what policy solutions might be capable of producing the 4-5% GDP growth necessary to deliver ‘prosperity’ and ensure social peace. It’s going to be, as always, more infrastructure spending, leading to higher debt to GDP ratio. But what happens next?
- In the US, and to a lesser but rising extent in the rest of the Western world, political polarisation is engulfing the world of business. Nowhere is this more apparent than in the polemic raging over ESG. The question is no longer about its effectiveness and how to eliminate greenwashing but rather whether adherence to ESG considerations (like climate change or gender or racial equality) in business decisions is simple unacceptable. ESG is the latest victim to fall foul of culture wars. Moving forward, expect the critics against “woke capitalism” to increase in intensity and some political parties to campaign on an anti-ESG platform. A new minefield for business decision-makers and investors.
- From the wreckage of the recent crypto onslaught that has wiped out $500 bn in value, two camps are emerging: (1) Those who’ve thrown in the towel, like Guggenheim Partners, whose CIO predicted two years ago that Bitcoin would reach $400,000 but now expects it to fall to $8,000 in a market driven by “a bunch of yahoos”. (2) Those who are doubling down, like Andreessen Horowitz who’s just launched a new $4.5bn crypto fund, betting on a coming “crypto golden era”. Today there are almost 20,000 cryptocurrencies. Most – and maybe even all – of them are junk!
- We will be addressing Web3/Cryptos in a new series of research papers (the MB Reports) available at intervals throughout the year to our MB 100 members. This month, the inaugural MB Report distils the outcome of the WEF Annual Meeting in Davos.
- For an in-depth proprietary analysis of any of the bullet points and what they mean for you or more details of the new MB Report series – please contact us. We provide tailor-made, independent research, with insights and actionable ideas based on a rich and diverse network. Details HERE.
