The global economy defies ‘like-the-past’ models – they don’t work anymore. Controlling public debt and austerity are as politically thorny as ever. Fossil fuels will go, but not without a fight. Migration: an economic must, but a political minefield. Why Western populism weighs in for Putin against Ukraine. One US-Chinese ‘swallow’ does not a new summery geopolitical outlook make. Events at Open-AI have opened the floodgates.

  • THE ECONOMY: WHY ISN’T IT AS BAD AS WE THOUGHT IT WOULD BE. Reliance on historical patterns that the Covid dislocations have rendered meaningless meant everybody got it wrong. The ‘like-the-past’ illusion is shattered and exposed for what it is: a fallacy. The inflation scare is behind us, with global disinflation occurring without a significant deterioration in the labour market. This explains why the global economy has until now performed better than expected, most notably in the US which has so far avoided a recession in 2023. One illustration of this: the models’ reliance on consumer sentiments (bearish) that utterly diverge from consumer decisions (bullish: the US consumer keeps spending and spending). Some US economists attribute this disconnect to reasons that have little to do with economic models and ‘like-the-past’ analogies: “anger is what’s driving the US economy”, says one.
  • TIGHTENING FISCAL POLICIES. Credit markets don’t seem too worried by elevated public debt and its consequences on fiscal policy, but many independent experts and the IMF are and rightly so. In high-income countries, the public debt to GDP ratio stands at 112% (very close to the 120+% peak of 1946 and 2020). In a context of tepid growth and higher interest rates governments will have to tighten fiscal policy substantially if they are to avoid a debt explosion that could lead to either (1) default, or (2) inflation, or (3) financial repression, or a combination of all three. But given ageing societies, arduous national politics, and challenging geopolitics requiring higher defence spending, austerity represents a tough political and societal challenge.
  • THE INEVITABLE EXIT FROM FOSSIL FUELS. A new report from the IEA (the government-backed International Energy Agency) prepared for COP28 makes two things clear. (1) Oil and gas producers only account for 1% of total clean energy investment globally – way short of what it should be and proof that the industry’s embrace of a green future is only skin-deep propaganda (60% of the 1% comes from just 4 companies). (2) Ambitious carbon capture projects are no substitute for cutting emissions. Under its net 0 scenario (an absolute requirement to prevent a climate catastrophe), the IEA anticipates falling demand and falling prices for oil & gas, forecasting oil at $42 per barrel by 2030 and $25 by 2050 (during the period 2010-2022, returns on capital deployed between ‘green’ and ‘brown’ were roughly similar: 6% versus 6-9%). Moving forward, investors in fossil fuel will therefore be exposed to considerable risks. The producers in the Middle East(where fossil energy is cheaper and cleaner) will be the last man standing. For all other producers, the financial outlook is bleak.
  • BUT IT WON’T HAPPEN SMOOTHLY. Tech innovation in clean energy will ultimately prevail, but fossil fuel producers won’t go without a fight. Most countries that produce fossil fuels are doing their utmost to slow down any policy framework that incentivises, regulates, and finances the fast transition to clean energy. The UAE just getting “caught red-handed” (C. Figueres) is proof of this. Recent leaks expose the “breath-taking hypocrisy” (to quote a UN observer) of Sultan al-Jaber (the head of both COP28 and the UAE’s national oil company) allegedly pursuing both ‘meaningful climate action’ and oil and gas deals. In our latest Changemakers podcast, Mark Maslin sheds important light on the subject and returns on 19 December for an Ask-our-Expert to decipher what came out of COP28. Don’t miss it!
  • THE POLITICS OF MIGRATION. In this era of “the three Ps” – (1) populism, (2) polarization and (3) post-truth – the success of the far-right in the Dutch elections is yet another sign of the rise of nationalist and ‘anti-establishment’ politicians. This global phenomenon besetting liberal democracies owes its origins to a deep divide between city- and rural-voters. The latter are preoccupied by what they view as uncontrolled mass migration, and its undesirable domestic impact. As a result, controlling immigration is becoming a key political priority. Yet, at only 1.2% in the Netherlands and 0.93% in France, annual net migration is not even sufficient to offset the effects of ageing. More migration is economically desirable, but increasingly politically unpalatable.
  • WESTERN POPULISM’S IMPACT ON UKRAINE. The ascendency of populism in Europe and in the US (where it is combined with a dysfunctional Congress) is Ukraine’s greatest concern. So far, Europe has provided a total of $100 bn to Ukraine; the US $75bn and the bulk of military assistance. With such policymakers as Mike Johnson in the US and far-rightists like Geert Wilders in the EU, many are pondering whether such funding can go on. Insufficient Western support would at best prolong the stalemate in Ukraine, and at worst force President Zelenskyy to negotiate with Russia from a position of weakness.
  • CHINA-US RELATIONS: DON’T CONFUSE THE WEATHER AND THE CLIMATE. The recent meeting between Biden and Xi signalled that both countries have an interest in lowering tensions at a time when they have serious problems at home (economic for Xi, political for Biden). The meeting led to a series of small agreements and measures destined to stabilise their relationship, but nothing has changed. The weather has improved, but not the climate. “One swallow does not a summer make, nor one fine day” (Kevin Rudd). Investors who believe this to be the sign of a real improvement: beware!
  • THE OPEN-AI SAGA. The recent governance chaos at the $90bn company working on the potentially decisive tech breakthrough of AGI (Artificial General Intelligence) illustrates the divide between those who think we should slow down and those who think we should speed up. The problem is that nobody quite understands what the end-goal is AGI, supposed to reach human-level machine intelligence, is both abstract and an experiment. The doomers worry about the devastating impact it might have on society and humanity (let alone democracy). The bloomers see a vast array of positive outcomes (like curing diseases, tackling climate change, or increasing productivity). In the end, money spoke. AI will speed up, be less controlled and everywhere.
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