The economic outlook is murky – creating confusion. Inflation is lower but hasn’t gone away – impacting sentiments. Fragmentation is looking likely – causing nervousness. China-US relations – today’s defining issue. US default, will it won’t it? Political fallout from green agenda turbulence. Are demographic’s enough to make it India’s century? Civil conflicts on the rise globally. So is obesity, and the war on it has been declared.
- THE GLOBAL ECONOMIC OUTLOOK: MURKY. Confusion about the global outlook prevails, with a plethora of conflicting opinions. The sharp US GDP slowdown in Q1 (+1.1% Y-o-Y) occurred despite strong consumer spending and a tight labour market, while the rebound in China (+4.5% annualized) took place in the context of CPI deflation without the much-expected brisk revival in domestic demand. In terms of leading indicators, hard data is ‘OKish’ while soft data is recessionary. Medium-term, global policymakers see darkening clouds on the horizon: the IMF’s 5-y global economic outlook is the weakest in 30 years; while the WB predicts that average global potential GDP growth will decline to 2.2% a year towards the end of this decade. All this said, most investors and market participants remain “blissfully” unperturbed.
- INFLATION: LOWER BUT STUBBORN. The world economy has passed peak inflation, but inflation remains stubborn: lower but entrenched, widespread and threatening to become persistent if policymakers drop their guard. Hence the tightening cycle is not over yet, and all this impacts sentiments.
- LOOMING FRAGMENTATION. The key reason for so much widespread uncertainty and nervousness. Both between and within countries, geopolitical and political risks are weighing evermore heavily on the economy, whether internally (see below risks of US default and the tough sell of climate policies in Europe) or externally. The latter is an obvious and fast-growing concern, with a rising acceptance that the world will end up divided into (two) blocs. At the recent IMF meeting, several Western policymakers alluded to the disturbing reality of countries unwilling to side with them. The leader of a developing country said it all when he confided to L. Summers: “The truth is, when we’re engaged with the Chinese, we get an airport. And when we’re engaged with you guys, we get a lecture.”
- CHINA-US. We keep banging on about the worsening relations between the US and China, but in our defence, this is one of the defining issues of our time. There are economic and security considerations at the core of this rising strategic confrontation, but these are so intertwined that it’s hard to figure out which will prevail – conflict or collaboration? There are many reasons for arguing that relations will become messier and more tense. The key one: any effort on the part of one or other of the two superpowers to improve its own sense of security (like China increasing its military budget or the US restricting tech exports) generates an enhanced sense of insecurity for the other.
- BUT DECOUPLING IS HARD. Except for chips and other high-end tech components, decoupling – the functional equivalent of deglobalizing – has barely begun. China’s dominance in global trade is such that re-shoring and friend-shoring will take years at vast expense for business. In addition, displacing production to ‘more friendly’ countries like India, Mexico or Vietnam does not effectively reduce vulnerability when intermediate goods continue to be imported from China. For investors: the more strategic the industry, the more difficult it becomes.
- US DEFAULT? Its extremely low probability / high impact likelihood is now a market concern – see the yield rising spread between 1 and 3-month notes. If it were ever to lead to a default, the showdown between Republicans and the White House would unleash “an economic and financial catastrophe” (to quote the US Treasury Secretary) of global proportions. Default or not default, this game of chicken will have grave consequences, forcing in the best-case scenario (no default) the government to renege on commitments already made.
- CLIMATE POLICIES: A TOUGH SELL. Albeit different from the French Yellow Vests in 2018, the current political and social upset in the Netherlands is similar in nature. Dutch policies to reduce nitrogen-based emissions have hit a brick wall, endangering the ruling coalition, and favouring populist parties. Green agenda turbulence is everywhere to be seen in liberal economies – a symptom of resentment and insecurity.
- AN “INDIAN CENTURY”? The news that India just overtook ageing China to become the world’s most populous country excites many investors. But is demographics economic destiny? A mammoth population does not necessarily equate to a similarly huge market for consumption because the devil lies in the distributional effects of growth (one revealing example: 1% of the Indian population ‘consumes’ almost half all flights taken). Yes: there is huge growth potential, but the demographic dividend will only be seized if hundreds of millions of young Indians are productively absorbed into the workforce. Two indicators to watch: (1) the rate of access to higher education and (2) the reduction of the gender gap.
- MORE CONFLICTS. Soudan is on the verge of a major civil war, epitomizing the global trend of rising civil conflicts which over the past ten years has forced about 100m people to flee their homes. This can but increase because climate change is a key contributing factor. As in the Sahel, it seems that the poorer and the hotter the country, the greater the likelihood that climate disruptions will trigger conflicts or makes them worse. In a doom loop, the burden of debt service exacerbates this predicament by making it impossible to provide basic public services, let alone respond to the climate crisis. Among the world’s poorest 91 countries, current repayments on public debt owed to non-residents amount to 16% of government revenues.
- NESTLE VERSUS NOVO NORDISK – Shortly after Nestlé acknowledged that 54% of its food and beverages (in revenue terms) were not “generally healthy” (due to their high content of saturated fats, sugar, and salt), Novo Nordisk announced that its ‘obesity-care’ sales had doubled in 2022, The resultant surge in market value now makes it Europe’s second largest company (after LVMH, before Nestlé). There is a certain logical irony in a pharma company overtaking the valuation of the world’s biggest food company after it developed a weight-loss drug. Obesity is rising all over the world, with experts estimating that the annual global cost of excess weight could reach USD4trn by 2035 (2.9% of global GDP). The war on obesity has been declared on multiple fronts with food companies under fire both from activists and legislators.
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