Can the global economy’s current short-term cheerfulness last? China’s re-opening matters globally, so does its ageing. Why going green is good not only for the environment but also for society and the economy too. National security trumps almost everything and determines ‘investibility’. There are two sides to the Chat GDP AI story. But, in the context of green tech, AI can do no wrong. We did get somethings wrong in 2022 – but we got some right too!

  • SHORT-TERM CHEERFULNESS – All of a sudden, the short-term outlook for the global economy is looking better (or less bad, depending on your perspective). This is thanks to the recent simultaneous run of positive economic news in the three main engines of the world’s economy: the US, China, and the EU. (1) In the US, and globally, inflation is abating. In December, the Fed’s preferred inflation gauge (the PCE index) went up by only 4.4%– the slowest increase in over a year. (2) In China, its zero-Covid policy ended on 8 January, and the hope is that the reopening will fuel an (economic) bounce back. (3) In the EU, the economy is performing much better than anticipated, largely thanks to falling energy prices.
  • WILL IT LAST? Central bankers spoiled the party by making it clear they’ll keep hiking interest rates. They fear that some underlying inflationary pressures will remain strong and argue that the improving global economy comes at the cost of higher inflation. Optimism about a soft landing (countries getting through the tightening with limited negative growth) may be tempered by the following factors: (1) sticky inflation justifying significantly higher interest rates; (2) trade fragmentation and technological decoupling, (3) geopolitical nasty surprises, particularly those coming from Russia’s aggression in Ukraine; (4) US political dysfunction affecting the US debt limit.
  • WHY CHINA’S RE-OPENING MATTERS – There is no doubt that China’s sudden and unexpected re-opening will boost its economy. A GDP growth rebound is therefore in the offing, driven by pent-up demand – a partial reversion of the contraction of consumption in 2022. This is pushing up global commodity prices (base metals are up 20% Q-o-Q) and will stoke inflation. The key question is: how long will this rebound last? China’s economy is still propelled by infrastructure investment (of which there is already plenty) financed by a surging debt burden.
  • CHINA’S POPULATION: DEMOGRAPHICS IS (ALMOST) DESTINY – China’s population has begun to decline, raising an issue that is becoming a critical consideration for investors and business leaders all over the world. Shrinking means ageing – a major global challenge for two key reasons. (1) Countries with a declining working-age population tend to have lower economic growth as a shrinking population reduces investment spending. (2) When the ‘dependency ratio’ rises, there are fewer working-age people to support – through the taxes they pay – a greater number of elderly citizens. For countries like China who haven’t had a chance to become rich before becoming old, this is a major economic drag and socially risky: either the government inflicts economic pain on its elderly, or it sharply raises taxes on younger citizens (or it does both). In high-income countries, this is also a burning issue, like in France where widespread demonstrations are seeking to prevent the government from extending the retirement age from 62 to 64.
  • GO GREEN! – Last year, global investment in the low-carbon energy transition broke a new record, with an aggregate of $1.1tr (with China outspending everybody else: $546bn). Most investors have ceased to see green investment as a costly burden borne by business, and now understand it for what it truly is: a huge opportunity for employment, economic growth, and financial returns. In the US – embarking on a ‘gigantic’ green investment boom -, the subsidies afforded by the Inflation Reduction Act have unleashed tens of billions of $ invested in the production of batteries, solar and wind components, or industrial projects. China is already massively subsidizing its green transition, and soon, Europe will follow suit. The ‘subsidies arms race’ will create a snowball effect in global green investment.
  • NATIONAL SECURITY AND ‘LOCALISM’ – Russia has succeeded in moving the EU green agenda resolutely forward. In a fractured world, every country is obsessed about national security, which, as a result, supersedes all other consideration. The themes of food security (local and shorter supply chains), energy security (renewables), tech and the security of other ‘sensitive’ industries (every country now has an industrial strategy) will determine “investibility”.
  • CHAT GPT – the generative AI platform launched by Open AI that everyone is talking about. Producing content to order has propelled AI into everyday life, with dual consequences. By “unblocking our minds” (in the words of a Google exec), it will make us more creative and productive, but it also poses deep moral, societal and philosophical questions. Some industries and jobs are about to be disrupted in a major way (for example design or writing). Chat GPR also brings with it increased potential for mis-and disinformation and the further undermining of issues of truth and trust. Without truth there can be no trust – a major concern in open societies.
  • A.I: A BOON FOR GREEN TECH – AI is a cause for both optimism and concern, but there is one domain in which it will bring unadulterated benefits: green tech. By virtue of becoming a general-purpose technology, it is ‘turbo-charging’ green investment by accelerating the deployment of breakthrough innovations across many different sectors, like fusion and solar, quantum chemistry or alternative protein design. In a recent paper, Nicholas Stern and his colleagues estimate that this remarkable pace of innovation will propel decarbonization forward by accelerating tipping points (when new technologies or practices out-compete the incumbents) in sectors as diverse as food & agriculture, aviation, shipping, cement, and others.
  • SOME OF THE BIG ‘CALLS’ WE GOT RIGHT AND WRONG in 2022: Wrong: (1) Global inflation (we stayed in the team ‘transitory’ until March) (2) Fearing a lost decade in emerging markets – a concern that hasn’t materialized in most of them. (3) Believing in the $’s continued strength – in fact since September, it is down 10.7% against a basket of currencies. Right: (1) Emphasizing early the speed at which Natural Capital would become a prominent business and investment theme. (2) Forecasting that Russia’s aggression would have no end in sight. (3) Arguing that the risk of a major EU crisis was overblown (yes: the weather helped). (4) Warning that the real estate sector would turn sour.
  • 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. Details HERE.