Global outlook grim. Global economy, limping not sprinting. Geopolitics impacts everything: economics, investor mood and moves. Western supremacy is a thing of the past. Some good news in Poland. Global repercussions of the Israel-Hamas war are bad news for Ukraine. Ultra-luxury market goes on rising. The double-edged sword of generative AI.

  • THE GRIM GLOBAL OUTLOOK. The world is becoming slowly but inexorably, messier, like a slow burn punctuated by occasional major crises like the one occurring between Israel and Hamas. Macro risks are on the rise and are amplifying each other’s effects. The global outlook is increasingly crisis-prone due to a combination of (1) geopolitical turmoil, (2) political polarisation and radicalisation, (3) and economic ‘belt-tightening’ (high interest rates crunch capital and narrow fiscal space). And this doesn’t even factor in the all-engulfing impact of the climate crisis, that reverberates across all the other macro issues.
  • THE GLOBAL ECONOMY: “LIMPING ALONG, NOT SPRINTING”. As the IMF chief economist recently put it. With China stalling and the EU on the brink of recession, only the US continues to defy gravity (but how long can this go on?). Global growth prospects are now at their weakest levels in 20 years. And with interest rates higher for longer, all economies will be forced to make painful adjustments to the rising cost of money at a time of record-high debt levels. Take the US: if it maintains its current path in terms of public deficit (currently 8% of GDP), its net interest payments will grow to more than 12% of revenues in 2028 (up from 8% in 2019). This is unsustainable. Most countries around the world, will soon be forced to put their fiscal house in order, spooking investors when they don’t go fast or resolutely enough.
  • GEOPOLITICS AND INVESTORS. Geopolitical risks are rising, but the markets keep discounting them. Shouldn’t the current wars between Israel and Hamas, Russia and Ukraine, Armenia and Azerbaijan, and all the skirmishes in places as different as the south China sea or the Sahel alarm investors? Yet today, as over the past few decades, financial investors do not seem too worried: after a geopolitical shock, (except for the Yom Kippur war in 1973) markets tend to drop a bit before recovering rapidly and fully. For the moment, this time seems no different. There has been no drama in oil prices and no rush to safety (in bonds). If the collective mind of the market assumes that the worst will not come to pass, it means that it believes these crises will have no lasting impact on companies’ earnings and the economy. But can this be true?
  • GEOPOLITICS AND ECONOMICS. Markets live ‘in the moment’, with a short memory and a short time horizon, but the assertion that geopolitics doesn’t matter cannot be true in the medium & long-term in the context of our new ‘geopolitical era’. The unipolar moment is over, with great power competition and multiple alignments morphing into economic fragmentation. All over the world, governments are reasserting the power over the economy that they had relinquished in the post-cold war era that heralded a phase of neoliberal globalisation. As a result, countries and companies’ focus is shifting from comparative advantage and efficiency to resilience and security. This secular trend favours reshoring and affects trade and capital flows and in the words of Michael Spence reduces “the supply elasticity of the global system”. This, in turn, increases inflation and interest rates, and contributes to diminishing global growth.
  • THE END OF WESTERN SUPREMACY AND INVESTOR BEHAVIOUR. In this new world, the Western bloc is no longer in a position of power. It is losing both its absolute supremacy and the ‘moral high ground’ in the face of accusations of hypocrisy coming from the ‘Global South’. This is bound to exert an effect on how Western businesses and investors go about things. They’ll have to do their geopolitical homework: choose carefully where to operate and how best to hedge the risks. Solutions will range from pulling out of certain markets before it’s too late to ‘re-inventing’ companies by making them truly multi-cultural. Western brands will lose some of their appeal. Organisations structured as a “lattice” rather than as a “ladder” (Adam Grant) will do best.
  • PUTIN – JOHNSON – ZELENSKY. In geopolitical terms, Putin is a beneficiary of (1) the Israeli-Palestinian tragedy which risks escalating and turning into a war of civilizations, and (2) Johnson’s appointment as a speaker of the House – the symptom of a more isolationist America turning inwards. This is bad news for Ukraine which now competes with Israel for US military supplies and attention. It might be forced to seek peace on unfavourable terms.
  • POLAND – A GLIMMER OF HOPE. The recent Polish election is proof that autocratic trends can be reversed. Despite all the efforts made by the ruling party to skew the elections, voters – particularly young female voters – rejected the ultra-conservative, anti-EU Law and Justice government, handing power to the democratic opposition led by Donald Tusk (a former PM and President of the EU Council). Good news for investors doing business there and the EU.
  • THE ONGOING RISE OF ULTRA-LUXURY. The economy is bifurcating, expanding at both the low- and high-ends of the market. While squeezing the middle and upper-middle market consumers who are now often forced towards the low, discounted, end. Consider these three examples (not outliers) at the very high-end: a night at an ultra-luxury hotel where ‘standard’ rooms start at £1,300 (the Peninsula in London); Advent calendars priced north of $500 (one at Tiffany’s retails at $150K+); or a sirloin steak for £760 (at Aragawa in London). All are part of the same story: the creation of scarcity to justify sky-high prices aimed at increasingly price-insensitive high-end clients. Conferringprestige and exclusivity at an outlandish premium is an enduring and mushrooming trend. The world’s biggest ultra-luxury market? India. Mumbai alone has more UHNWI than Monaco.
  • THE PROMISE AND PERIL OF AI. The AI revolution is vital because only technology can succeed in reversing the productivity slowdown that besets many advanced economies. More specifically, generative AI can become a truly ‘general-purpose technology’, thus a major driver of global economic prosperity. But without proper control or regulation it could also inflict catastrophic harm. One of the greatest concerns is the way in which AI is being used to sow discord and magnify disinformation. It also feeds into the conspiracy theories that plague more and more countries. In the US, 23% of adults are QAnon believers (up from 14% two years ago).
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