Gloomy sums up the global economic outlook. Deepening describes the ongoing global energy crisis. Except for a few, difficult is what a strong $ is going to make life for the rest. Still rising is the direction of far-right populism. Does survivable describe the pain inflicted on Europe by Putin’s weaponisation of energy? Increasingly plausible is how a Chinese attack on Taiwan looks. Hard is the sort of landing towards which the Chinese real estate sector is heading.  Mounting (despite all the evidence) still describes politicised backlash against green polices.

  • SOMBER ECONOMIC OUTLOOK – No need to beat around the bush: the global economic outlook is “increasingly gloomy” (as the IMF chief economist puts it). The three major economies – China, Europe, and the US – are facing a synchronized slowdown that will drag into its wake the rest of the world. Compared to just three months ago, the IMF now predicts much lower global GDP growth (respectively 3.2% and 2.9% in 2022 and 2023) and higher inflation (in 2022: 6.6% in the rich world and 9.5% in emerging markets and developing countries). The combination of the global economy entering a recession with high levels of debts while a tightening of monetary policy takes place means that the shock will be more severe than many analysts expect. In effect, there is no or very little fiscal space available anywhere.
  • ENERGY: A PROTRACTED DRAG ON GROWTH – The global economic outlook cannot get better unless the energy situation improves around the world. This is unlikely to happen in the coming months because the energy crisis will most likely deepen. The reasons are threefold and concatenated: (1) Putin is weaponizing energy by rationing supplies; (2) Saudi Arabia and the UAE have no extra capacity; (3) Sanctions on Iran will not be lifted, preventing the export of its oil. In addition, any rebound, particularly in China, would lead to an increase in demand, and therefore in prices. In the next six months or so, the multifaceted energy crisis that affects oil, natural gas, coal and even the nuclear-fuel cycle could prove to be worse than the one experienced in the 1970s.
  • HIGH INDEBTDENESS AND STRONG $ – The combination of the sharp increases in interest rates and stagflation pressures (the toxic situation when growth slows at the same time as inflation rises) will make it very difficult, if not impossible, for many countries to roll over their debts. The risk is particularly acute in emerging markets and developing countries with large current account deficits and heavy reliance on foreign capital inflows. The dollar strength makes it also perilous for those with high levels of $-denominated debt, whether sovereign or private. Except for commodity exporters, global companies with $ earnings and American tourists, the strong $ (now up 15% Y-o-Y against a basket of currencies) makes everybody’s life increasingly difficult. There is no immediate respite to this situation in sight because it’s hard to think of what could break the multi-year strong US$ super cycle.
  • PLUTO- AND FAR-RIGHT POPULISM ON THE RISE – Anti-elite, anti-globalist movements are gaining ever-more ground in the Western world. In the US, the January 6th investigation seems to have done little to dent the chances of Donald Trump running for President, nor the appeal of the MAGA movement. In Italy, the possible election of Giorgia Meloni (head of the far-right, populist, and a Putin sympathizer) in September (following the resignation of Mario Draghi) would make a difficult situation worse. Expect more turbulence and volatility (notably in the bond market).
  • RUSSIA RETALIATING IN KIND – Russia has just reduced to 20% of total capacity its gas flows to Europe. It could still go further by cutting them entirely, in which case EU GDP growth could contract by up to 2.5%. As Europe’s ability to replace Russian gas with LNG can only be extended with immense difficulty, it follows that the only realistic way to cope with limited supplies is through cuts in demand, i.e., energy rationing. The coming Winter will therefore be decisive: either Europe overcomes its upcoming difficulties (recession, soaring energy bills, political divisions, etc.) and emerges stronger, or Putin’s conviction that he can outlast the West by imposing pain to consumers through commodity price inflation and split the EU will prevail. For several reasons, we are relatively confident that the former will prevail, and that the short-term scramble to make it through the Winter will give way to an effective, long-term switch to renewables.
  • TAIWAN RISK – Increasingly, Western intelligence sources believe that a Chinese attack in Taiwan over the next 18 months is plausible. Even if not an out and out aggression, but ‘only’ a major miscalculation, the effects would be immeasurably more disruptive – geopolitically, economically, and financially – than Russia’s invasion of Ukraine. It would mark the official end of US superpower status and would provoke widespread havoc. A global shortage of microchips – on which almost all industries depend – would be the most immediate and damaging effect. Currently, Taiwan accounts for 92% of the world’s semiconductor manufacturing capacity.
  • CHINA’S REAL ESTATE TROUBLES – In China, the recent boycott of mortgage payments on unfinished projects in many cities has re-ignited the fears of a hard landing of the real-estate sector. The government seems to be preparing an industry bailout of around RMB 300bn (USD44bn), but S&P predicts that Chinese property sales could fall a third – twice as much as it thought just three months ago. A significant risk exists that the loss of confidence provoked by the contagion from weakening sales could take down more real estate businesses, triggering a snowball effect. The real estate crisis in China is taking the form of a slow-moving train crash.
  • CLIMATE AS THE ‘MOTHER’ OF ALL RISKS – The scorching heat waves all around the world (notably in China, India, Europe and the US) areproof that global warming is occurring much faster and with greater severity than anticipated. A fast-warming planet will trigger an endless cascade of economic, financial, geopolitical, and societal risks for which we are collectively unprepared. Yet, despite the extreme emergency, the backlash against green policies and its politicization are mounting in numerous forms, like the treasurer of West Virginia in the US banning banks that don’t support coal from doing business with the state. Ultimately, these efforts will be defeated by the magnitude of climate risks (+ the rising role of whistleblowers, activists and litigation), but for the moment businesses are engulfed in the ‘polarization trap’ and are being asked to take sides.
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