A resilient global economy but not to the same extent everywhere. Beware of ‘junk’ crawling out from under the low interest rate woodwork – almost everywhere.  Not everyone feels threatened by AI but enough do to make it matter. Extreme heat events will impact everything. The worsening climate crisis engenders climate fatigue, powering political polarisation. Putin will stop at nothing not to stop fighting. Not for everyone, but those who can still favour WFH.

  • GLOBAL ECONOMY QUITE RESILIENT BUT MARKED BY DIVERGENCE. The global economy doesn’t look as bad as it did a few months ago, but the fortunes of its three key engines are diverging. (1) So far, the US is doing much better than expected (+2.4% GDP growth in Q2) and proving far more resilient than anticipated to rising interest rates. Although the Fed just increased its benchmark rate to 5.5% (the highest in 22 years) it no longer forecasts a recession. (2) The EU is stagnating but doing a bit better than expected. (+0.3% in Q2, but with core inflation at a stubborn 5.5% in July). Its recent downturn was led by Germany (the only G7 economy whose GDP might contract this year). (3) China is tottering on the brink of deflation and has ceased to be a source of “perpetual growth” for the rest of the world. Its economic outlook is sombre, with numbers disappointing across the board. Youth unemployment, at around 23%, is a particular concern.
  • BEWARE OF JUNK. Evidence of rising downgrades is mounting, which means that riskier companies either spiral towards default or must pay more to issue new debt. Prolonged zero interest rates provoked malinvestment, and now that interest rates have risen, businesses with weak fundamentals that binged on cheap debt are bound to be in trouble. For junk bonds, junk loans, private credit funds, junk CLOs: the pickup in defaults can only get faster. Two symptoms: (1) SPACs (all the rage 2-3 years ago) have shrunk from 800+ to just a few dozens. (2) In Q2, the USD1.4tn American junk loan market was hit by 120 downgrades – the highest number since the Covid crisis.
  • COLLISION BETWEEN AI AND LABOUR UNIONS. The thought that technology benefits the economy in the long run is of little comfort to the workers who risk losing their income (or part of it) because their skills are no longer needed. Many are already crowded out by technology and sorely aware that it will take months or years of retraining and adjustment before they can benefit from the overall positive economic effects of tech innovation. The current strike of both writers and actors in the US, who notably demand protection against AI, crystallizes this issue. In the coming months and years, as AI makes its way into companies and the economy, expect strikes to multiply as workers fear being frozen out and left behind by technology (among other things). Last year in the US, the number of major worker strikes rose to its second highest level in two decades, and at this moment 660,00 US workers are threatening to go on strike. The situation is similar in Europe. Albeit inflation and higher wages are a primary consideration, technology and AI are not far behind.
  • EXTREME HEAT AND THE ECONOMY. June and July were the earth’s hottest months on record, with unprecedented heat waves engulfing much of the northern hemisphere. The burgeoning science of “extreme event attribution” shows that it is unlikely that such disasters could have occurred without climate change. As they become more intense and more frequent, they will impact everything. From an economic standpoint and all things being equal, extreme heat (1) drags down growth and (2) lowers productivity (by making it harder to work). The sectors most at risk with the highest cost of adaptation: tourism, construction, agriculture, transport, insurance, and manufacturing. Therefore, investing in nature-based solutions to adapt to more heat and make our cities, homes, and workplaces more liveable will ‘explode’. The greater the problem – the more intense the search for solutions.
  • ‘CLIMATE FATIGUE’: POLITICAL AND SOCIAL POLARIZATION. Paradoxically, as the climate crisis worsens, ‘climate fatigue’ amplifies. Hence, the backlash to climate policies is widespread from China to Western Europe. Even the German government, a best-in-class in terms of green policies, recently backtracked on two critical measures for fear of antagonizing the right-wing populist party (which is rising fast while rejecting meaningful climate crisis policies). Addressing the climate emergency without destroying public support is indeed a hard call. In the years to come, expect the far right and the more conservative parties to drag their feet on the energy transition in an attempt to keep voters onside (like in the UK where the government is watering down carbon reforms). As climate action becomes more demanding, polarization will increase.
  • RUSSIA’S NEVER-ENDING WAR IN UKRAINE. 18 months after Russia started the war, Ukraine has launched a new counter-offensive. Tentative evidence shows that regaining its lost territory is getting harder as time goes by (for the simple reason that defending is much easier than attacking). Meanwhile, Putin, the emperor with no clothes, is resorting to more extreme measures like: (1) enacting a new law that will enable the sending of hundreds of thousands of new young Russians into combat, (2) abandoning the grain agreement to inflict more damage on Ukraine’s already severely weakened economy (pre-war, food represented roughly 40% of Ukraine’s total exports), (3) strengthening co-operation and military ties with rogue regimes like North-Korea. The bottom-line: Putin will do whatever it takes to keep fighting. Over the next 18 months, all his chips are on a Trump If re-elected, Trump has committed to end the war within 24 hours in office and is indeed Putin’s best bet.
  • THE ENDURING APPEAL OF WORKING FROM HOME (WFH). Despite all the noise about companies demanding that their employees return to the office, remote work is alive and kicking. Whether it’s at large companies like Amazon, Google, Starbucks and Walt Disney, at financial institutions or public organisations, employees and unions are fighting for homeworking rights. The bottom line: WFH is here to stay and may even rebound through a combination of individual backlash (the best talent tends to demand WHF) and industrial action. The consequence: a precipitation of the already looming crisis in commercial real estate. In most advanced economies, office buildings remain half as full as they were in 2019.
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