Global recession is almost a given, but there is mixed-messaging as to its severity. Security concerns and suspicion are pervasive – policymakers decide, business must adapt. How much has the Wagner attempted coup weakened Putin? Conserving natural capital is not an option, it’s a necessity for economic growth. The same is true for the deployment of generative AI and business performance. Luxury rules – resilient and irresistible.
- A GLOBAL RECESSION: MILD OR SEVERE? With the US economy performing better than expected, the eurozone slipping recently into a technical recession, and China’s hesitant recovery, analysts are debating whether the global economy will soon be facing a short and mild recession or rather a severe and protracted one. Whichever, unquestionably the global economic recovery will be dogged by three intertwined constraints (1) over-indebtedness, (2) inflation above target and (3) tighter monetary policy. Global economic growth is almost certain to be lower for longer, below the 3.4% 7-y average that preceded the pandemic. The OECD sees it at 2.7% this year and 2.9% next. As for the general manager of the BIS (the central bank of central banks), he predicts that if governments don’t raise taxes and / or rein in spending, persistent inflation, financial instability, and a global recession will ensue.
- INFLATION: HIGHER FOR LONGER, LIKE RATES. In much of the world, headline inflation rates are receding, but core inflation rates (that exclude energy and food) remain elevated, often at multi-decade highs. A survey of reserve managers from 75 central banks around the globe (collectively managing about $5tr) reveals that they do not expect inflation to return below 2% over the next 2 years. We therefore reiterate that the tightening cycle in major economies is not over yet. Let’s take it from those in charge: the world’s major central bankers just announced that (1) they will increase interest rates further and (2) will keep them high.
- GEOPOLITICS TRUMPS ECONOMICS. This is another, non-economic factor contributing significantly to the “lower growth – higher inflation” outlook. The dominant power (the US) is refashioning the world in a more insular guise. The criticality it places on national security supersedes any other consideration and broadens its remit well beyond defence. The ‘security’ realm now includes energy, food, supply chains, tech and beyond. Policymakers are the ones calling the shots and business executives and investors have no choice but to adjust to a retrenching world, less dependent on international trade and capital flows. Inevitably, such a world will produce less growth and some inflation because resilience comes at the cost of less efficiency.
- HIVING OFF IN GEOPOLITICAL ZONES. AstraZeneca just provided a telling example of geopolitics trumping economics by doing what many European and US multinationals are considering. It will hive off its Chinese business by listing it separately in Hong Kong or Shanghai. The idea is to ringfence Chinese operations to secure two forms of protection in case of a crackdown on foreign companies. (1) Vis-à-vis China, a local listing makes it ipso facto a ‘local player’. (2) Vis-à-vis the US, the mother company can no longer be questioned about its Chinese exposure. State suspicion of foreign companies goes both ways and is pervasive. In Italy, at the request of the government, the tiremaker Pirelli just stripped its largest shareholder (China’s Sinochem) of its influence, invoking “national security concerns”. Yet another example of the expanding elasticity of the notion of national security.
- PUTIN’S WEAKNESS. The mutiny was short-lived but now the drama begins. How was it that one of Putin’s favoured courtiers and head of a transnational criminal organization (the Wagner group) intimately linked to the Kremlin was able to launch a revolt with seemingly no resistance and get away with it? Only time will tell, but Putin comes out of this weakened and humiliated. He is no longer the anchor of stability the Russian elites thought he was, and the dysfunctional nature of the regime is now glaringly obvious. What comes next? (1) The system’s demise is now plausible, but it could still take a long time. Putin’s frailty has been exposed, but that doesn’t mean he’ll be out of power anytime soon. (2) Putin’s disarray negatively impacts Russia’s capacity to wage war, presenting Ukraine with opportunities, both on the battlefield and strategically. (3) To date, Putin believed time was playing in his favour. Now the opposite is true.
- NATURE VS. ECONOMIC GROWTH? NO! This is a false dichotomy because the two go hand in hand. First, as the ECB just made it clear, “if you destroy nature, you destroy the economy.” In the Eurozone, 72% of companies and 75% of bank loans are nature-dependent and therefore exposed to the loss of nature services like pollination, clean water, timber supplies, or healthy soils. Second, as a new WB report shows, there are significant efficiency gains to be harvested from using natural capital more effectively. For example, the annual income in agriculture and forestry could be increased by $329bn per year with no adverse effect on the environment while providing enough food for the world’s expanding population. Such a transition will require new policies and notably redirecting the annual $1.3tr of direct subsidies currently allocated to agriculture and fossil fuels. Not easy but doable and necessary.
- AI’S FAST ADOPTION A MUST. Barely 8 months after generative AI came to the fore, business executives share the common belief that fast AI adoption and expertise will allow them to increase market share and profit margins. Early evidence from large public companies supports this, showing that deploying AI is indeed pervasive, and that those embracing the technology the most are outperforming their peers (as measured by their share price). The key benefits of generative AI lie in (1) customer service, (2) marketing and (3) R&D – the three elements at the core of any large company’s operations. For data-intensive industries like financial services, insurance, pharma, or retail, lagging in AI adoption amounts to a kiss of death.
- LUXURISATION RULES. Kering’s recent acquisition of Creed (an ultra-high-end fragrance) is proof that personal luxury continues to be an expanding and resilient sector of the economy. It’s hard to tell the size of the luxury market, but it’s reasonable to presume that the world’s 56 million millionaires are all part of it – a figure set to increase with the expanding middle classes in emerging markets. What makes this group so peculiar from an economic standpoint is its relative price-insensitivity. Irrespective of the industry (whether it’s beauty, hospitality, tourism, or real estate), premium products grow faster than mass products.
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