The slow-rolling macro crisis. Central banks’ conundrum with rising interest rates that hurt. IPCC latest report: we’ve been warned. Xi’s vassal, Vladimir and his long-lasting war. US-China – decoupling is no longer unimaginable. What AI can do for productivity.

  • THE SLOW-ROLLING MACRO CRISIS – Last month, we felt that the better-than-expected economic outlook was very much at the mercy of an accident. It just happened. The recent turmoil in the US and European banking sectors has put the spotlight on financial stability risks at a time when the global economy is over-leveraged (global debt currently amounts to 338% of global GDP, compared to 247% at the end of 2021). Going forward, the greatest source of risks and uncertainties lies in geoeconomics: the world is dividing and fragmenting. The economic effects of retrenchment on trade and capital flows will leave everybody poorer and more on edge. The World Bank projects that global GDP will go down to 2.2% per year for the rest of this decade, down from 2.6% between 2011 and 2021 and 3.5% in the decade before that.
  • CENTRAL BANKS’ CONUNDRUM – The troubles in the banking sector couldn’t come at a worst possible moment since core inflation remains elevated in the US at 5.5% in March Y-o-Y or, in the Euro-area, has even accelerated to 5.7% in March – Y-o-Y. The trade-off between inflation and financial stability is a tough one to get right: if central banks raise rates further to reduce inflation, they risk fuelling financial instability, but if they lower rates to reduce financial instability, they risk fuelling inflation.
  • RISING INTEREST RATES ‘BREAK’ THINGS – The initial belief among some market participants that it’s possible to tame inflation by rising interest rates without collateral damage on growth and unemployment is in tatters. The end of cheap money and tightening financial conditions tend to ‘break things’, in particular for: (1) banks by weakening their balance sheets, and causing embedded hidden losses to bubble up, (2) venture capital by bringing multiple valuations down to earth and the industry’s strong momentum to an abrupt end, (3) private equity by slowing activity and making the L in LBO more expensive, and (4) commercial real estate by rendering the financing of new deals or the refinancing of existing loans more expensive.
  • IPCC LATEST REPORT: WE CAN’T SAY WE WEREN’T WARNED! The IPCC has just asserted with “very high confidence” that “there is a rapidly closing window of opportunity to secure a liveable and sustainable future for all.” If the science-based opinions of hundreds of experts whose statements must be approved by the representatives of 195 countries are not heard and acted upon, what will be? The only solution is to keep global warming as low as possible, which means halving greenhouse gas emissions by 2030 and then adding no more carbon dioxide to the atmosphere before 2050. A very tall order for countries and companies still committed to fossil fuel projects. Those who engage in climate and nature procrastination are in for a reckoning; while those who engage in climate action will have to take into consideration “equity, climate justice, social justice and inclusion”. The bottom-line for investors: environmental degradation and climate change are the ‘mother’ of all risks, unavoidably intertwined with other macro risks like geopolitics (via climate justice) and societal issues (via equity and inclusion in policies destined to fight climate change and biodiversity loss).
  • XI AND HIS VASSAL: VLADIMIR – It seems that the key purpose of the meeting between the two leaders was not to address Ukraine or anything specific (like a gas deal), but rather to consolidate the China-Russia alignment in the context of sharply deteriorating Western-China relations. The survival of Putin’s regime depends on China, with stark asymmetry: China imports Russian natural resources massively at a major discount and is increasingly a key exporter of goods to Russia. This is not a relationship of equals: Russia has become the vassal destined to further China’s national interests.
  • THE LONG-LASTING WAR – Putin cannot win the war but hopes he can outlast the West’s resolve to support and arm Ukraine. His thinking: firstly, Europe is not short of “useful idiots” (to quote Lenin), far-rightists and conspiracy theorists who sympathize with Putin’s views about the decline of the ‘West’ and share his ‘anti-woke values’; secondly, in the US, Republican voters are slowly moving towards an anti-war position (less than 40% of them now support the provision of weapons to Ukraine). Next year’s US election (November 2024) will be the litmus test. The prospect of a new American President disengaging from Ukraine is Putin’s only remaining hope and Europe’s nightmare.
  • CHINA-US: BEYOND THE INFLECTION POINT – US-China relations have become so acrimonious that a large scale or even full economic decoupling (barely imaginable until recently) is now a plausible scenario. The US is effectively putting into place a policy of containment vis-à-vis China, while the EU is “de-risking” its relationship – hoping this will limit the decoupling. Depending on its scope and size, it would, according to the IMF, cost the global economy anything from 0.2% to 7% of GDP and would in the medium and long-term constrain innovation and growth globally.
  • SOCIAL MEDIA, AI, BANK AND SOCIAL TURMOIL – There is a commonality between the fall of SVB and the recent social turmoil in some democratic nations: the speed of contagion and the seeming inability to distinguish facts from fiction. We are all online, immediately reachable and confronted with a cocktail of deepfakes, misinformation and possibly disinformation.
  • AI AND PRODUCTIVITY – There is much hope that generative AI will spur on productivity. Some economists (at Goldman Sachs) believe it could increase labour productivity by as much as 1.5% per year over the next decade. This would be manna from heaven for economic growth, but it would entail a great deal of disruption. There is little doubt that it will be a net positive in the long-term, but in the short term the labour market will suffer from significant AI displacement effects. Workers in admin support will be hit the hardest, but hundreds of millions of full-time workers will be impacted by ‘automation, with, in most cases, AI complementing their work. All in all, the cost of adjustment will be high for some time to come.
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