The recessionary global economy, inflation receding but persistent, from QE to QD, a positive turning point? US midterm elections: another turning point? Climate justice more pressing than ever, US and EU: more than a marital tiff, is this the “Golden Age of technology fraud”? Real estate’s prices dropping. 

  • THE RECESSIONARY GLOBAL ECONOMY – The world economy continues to teeter on the brink of recession, with policymakers forced to deal with an impossible trilemma of (1) reducing inflation; while (2) protecting employment and growth; and (3) maintaining financial stability. Many think (or hope) that the recession will be short and shallow, but this is not a standard business cycle: economic policy must contend with a broad array of non-economic risks that blur the picture and make the task much more arduous. The climate and nature emergencies, geopolitical turmoil, adverse societal trends (for example nationalism, retrenchment, illiberalism), demographic shifts, big question marks about the role of technology – all these alter the playbook, fuelling uncertainty and volatility.
  • INFLATION RECEDING BUT PERSISTENT – Energy prices, which surged by 60% in 2022, should decline by 11% in 2023 but will still remain 75% above their 5-year average (according to the World Bank). As the large increases in commodity prices reverse, headline inflation will decrease sharply over the next few months. This said, underlying inflation will remain above the 2% target, preventing central banks from relaxing policy. (For example: the US employment cost index is running at around 5%). Most developing economies will continue to be hit hard, as currency depreciations intensify the food and energy crisis.
  • FROM QE TO QD – “Quantitative Destruction” follows Quantitative Easing. 14 years ago last month, when the Fed bought USD600bn of mortgage-related debt to prevent a collapse of the US financial system, it started a policy of ‘super-cheap money’ which has just ended. The costs of such policies are now glaringly obvious, with the retreat from QE threatening financial stability. Without debating whether QE was an original sin or not, it is worth noting that (1) it distorts prices and therefore risk assessment, (2) it props up zombie companies, and (3) it blurs the relationship between fiscal and monetary policies.
  • A POSITIVE TURNING POINT? There is some tentative, non-conclusive, evidence that the prevailing zero-sum, divisive approach driven by great-power competition is finding its limits. As the global challenges (like the climate emergency or the economic recovery) reach such worrying magnitude, could it be that a growing number of key players decide to change course, aware that the current nationalist-fuelled fragmentation is the surest path to a catastrophic dead-end? At the G20 in Bali and COP27 in Egypt, numerous calls for renewed multilateral cooperation were made. Similarly, some prominent international business leaders and policymakers are warning about the risks of a world dividing into competing blocks. Even the bilateral meeting between Biden and Xi made that clear. Is there a ray of hope? Too early to tell, but some glimmers have emerged.
  • US MIDTERM ELECTIONS: ANOTHER TURNING POINT? Likewise, could the unanticipated outcome of the US midterm elections mark another positive turning point? Extremists’ votes are down (although often only by a slim margin) perhaps signaling a collective willingness to move beyond fake news and illiberalism. Is this one more sign that liberal democracies are fighting back? Watch this space – one swallow does not a summer make.
  • CLIMATE JUSTICE MORE PRESSING THAN EVER – At COP27, the UN Secretary General warned that “We are on a highway to climate hell with our foot on the accelerator”. Many of his fellow participants concurred, like the US negotiator John Kerry who pointed out that much more needs to be done and “at 6 times the current pace”. The agreement on a “loss and damage” fund to compensate the poor countries most vulnerable to climate change was an achievement. But the gathering failed to wind down the consumption of fossil fuels. Moving forward, the issue of climate justice which is key to the acceptability of efficient policies, will be at the forefront of policymaking and activism, at both the national and international levels.
  • US AND EU: MORE THAN A MARITAL TIFF – Biden’s IRA – that subsidizes everything green provided it’s made in America – is becoming a thorny issue between the EU and the US. It could precipitate an exodus of R&D and business investment from the EU to the US – potentially creating what one EU official describes as an existential crisis. What does this tell us? (1) Industrial strategies are back in force,everywhere, with subsidies no longer off limits and (2) the same goes for mercantilist policies, rooted in the doctrine that trade can be expanded at the expense of others.
  • IS THIS THE “GOLDEN AGE OF TECHNOLOGY FRAUD”? In the same week that the Theranos’ founder was sentenced for fraud, FTX (a $32bn crypto exchange) imploded overnight. The implosion of FTX has done untold damage to the crypto industry’s reputation and aspirations. So too for the many reputable entities – like Sequoia Capital, Temasek, or The Ontario Teachers’ Pension Plan – that had invested in it after “extensive due diligence”? Bitcoin now trades at 75% less than a year ago, and the lack of regulation means that nobody knows to what extent fraud and Ponzi schemes pervade this industry. The crypto world is in disarray, but this won’t stop fertile experiments with blockchain, tokenisation and the metaverse. Contrary to crypto-money, these will be used to solve real-world problems – like making the currently opaque market for carbon credits more transparent.
  • REAL ESTATE’S PRICES DROPPING – To understand how far property prices could decline, look no further than Sweden, until recently one of the world’s ‘hottest’ real estate markets. Due to the combined effect of rising interest rates and the cost-of-living crisis, Sweden’s home prices have gone down for seven consecutive months. A total of 14% from their peak. Peak-to-trough declines of 15-20% are plausible in countries like Sweden, the US, the UK, Canada, and New Zealand, which would wipe out gains registered during the pandemic. This kind of decline could take the form either of an orderly correction, or of a brutal crash with forced sales causing much collateral damage.
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