Taming the inflation beast. Lagging productivity. China’s deceleration. Water crisis and economics. Putin’s war & energy. EU energy crunch ‘catastrophic’ or not so ‘catastrophic’? The pandemic changes that are here to stay. The politicisation of ESG is gaining momentum. 

  • TAMING THE INFLATION BEAST – Central bankers have by now made it clear that monetary policy tightening will persist. To tame inflation, interest rates need to be higher for longer. This will entail, as the Fed chairman just observed, “a sustained period of below-trend growth”. Inflation will ease, but a return to the low-inflation era of the past decades is unlikely, with an era of “Great Volatility” replacing one of “Great Moderation”. In effect, the disinflationary structural trend has turned, with (1) global geopolitical turmoil, (2) the partial retreat from globalization and (3) climate chaos structurally feeding into highly volatile price pressures through repeated supply shocks to the global economy.
  • LAGGING PRODUCTIVITY – Two years ago, the way in which businesses and individuals embraced tech and innovation during covid aroused a great deal of excitement about how rising productivity might come to the rescue of GDP growth (by stimulating it). But new research and recent data suggest that the much-awaited productivity boom is not here yet and may even fail to materialize at all (in the five quarters of 2021-2022, productivity growth fell to a mere 0.6% in the US). Simply put: despite more people employed, economies are producing less.
  • CHINA’S DECELERATION – China, the only major country easing monetary policy, just reduced its 1-year lending rate by 10 basis points to 2.75%. It did so against expectations, suggesting that the economy faces considerable headwinds and is in a worse state than most analysts think. The July ‘all-time high’ trade surplus is not a bright spot (as often stated), but the sign of an inherent weakness: despite years of ebullient economic growth, structurally low consumer spending persists (private consumption still accounts for less than 40% of GDP). Furthermore, the seemingly never-ending, slow-motion real estate crisis is now unfolding against the backdrop of the zero-covid policy and an unprecedented heatwave / drought that are both curtailing economic activity and denting consumer confidence. This concatenation of crises makes it hard to see how China could raise its growth rate – the only option to address indebtedness. The necessary re-orientation of the economy from investments (which benefit the economy less and less) to consumption will prove arduous.
  • WATER CRISES AND ECONOMICS – Multiple droughts around the world have led to a global power crunch. Whether it’s the Three Gorges Dam (the world’s largest power station supplied by the Yangtze River) operating well below capacity, the Rhine and Danube being closed to barge traffic, the drying Colorado river leading to drastic water cuts, or French nuclear reactors forced to close due to a lack of water to cool them, the same scenario prevails: factory shutdowns and fractures in supply chains. Water scarcity is rapidly becoming a pressing issue for business and investors via: (1) the regulatory pressures and associated cost increases on hydro-dependent industries (notably: food & beverage, mining, power generation, electronics, clothing); (2) the necessity to invest in water-related infrastructure (to reduce water waste and pollution, and to re-use water).
  • PUTIN’S WAR AND ENERGY – Six months after Putin launched his disastrous invasion of Ukraine, it seems that Russia cannot win the war, but nor can Ukraine. Instead, the conflict drags on, with a reciprocal weaponization of everything (financial and trade sanctions on the part of the West, and food, energy, and information on the part of Russia). Putin’s immediate plan of starving the EU of energy this winter aims to (1) trigger social unrest, (2) fracture EU unity and (3) bring to power political parties sympathetic to Russian views. But…
  • EU ENERGY CRUNCH: NOT SO ‘CATASTROPHIC’ – Many analysts describe the coming European Winter in ‘cataclysmic’ terms. We disagree. There is no doubt that soaring energy prices (with a respectively 14-fold and 10-fold increase in gas and electricity) will inflict much economic pain, but necessity being the mother of invention, much will change – for the better. (1) On the supply side, the EU is on track to exceed its 80% target of storage capacity set for 1st November while greater than expected energy substitution (electricity replacing gas) is taking place in energy-intensive industries. (2) On the demand side, small but significant incremental reductions in energy consumption can go a long way. They range from the myriad behavioural changes that cost nothing (like turning down the heat or turning off illuminated signs at night) to investments in the wave of innovations coming our way (like smart meters or ultra-efficient heat pumps).
  • PANDEMIC CHANGES HERE TO STAY– For now, there are two that stand out. These will have major repercussions on some industries. (1) Working from Home (WFH). This will most likely stabilize at around 30% of total working hours – a 600% increase compared to the 5% projected pre-pandemic. This is a major issue for commercial real estate and adjacent businesses, but an upside for those who can work remotely. In the US alone, this will save more than 800m hours and 25bn miles of commuting every month. (2) Unlike leisure travel, business travel will never fully recover, with some experts predicting it will stabilise at 80% of pre-pandemic levels.
  • POLITICISATION OF ESG –In recent months, ESG has been engulfed in culture wars, with concerns about environmental and societal issues becoming a highly polarizing and politicized issue. As a result, ESG investing is under attack. For example: Texas is trying to isolate financial firms perceived as hostile to the fossil-fuel industry. In Arizona, the Republican Senate nominee (Blake Masters) characterizes ESG scores as an “existential threat” to his country, while in Florida, Governor Ron DeSantis just banned state pension funds from screening for ESG risks. The US is at the forefront of this battle, but European political leaders (particularly those from the far-right) and the growing crowd of conspiracists are not far behind.
  • 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.