Global growth: “Tepid twenties”. Rates: “higher for longer” goes on. The US economy relative strength: a problem for the rest of the world. Trade policies: a “race to the bottom”. The high risk of a ”Great Reversal”. Climate action is an economic no-brainer. Ukraine in a critical situation, victim of an “anti-hegemonic coalition”. Global rearmament on steroids. Four canaries in the mine.

  • TEPID TWENTIES. At its recent Spring meeting, the IMF forecast global growth at 3.2% this year and next, while reiterating that the medium-term outlook remains the weakest in decades. In five years from now it expects global growth to be at 3.1%. Why is this? (1) low productivity – but it could enjoy a surprise boost thanks to tech and AI; and (2) global trade tensions, which are unlikely to improve in the foreseeable future.
  • HIGHER FOR LONGER: MORE EVIDENCE. Last week’s US economic data came in softer than expected, with GDP growth in Q1 at just 1.6% on an annual basis instead of the 2.5% the market had anticipated. Meanwhile, the Fed’s preferred measure of inflation increased to 2.7% in March on an annual basis. This combination of slower, but nonetheless robust, growth and nagging inflation has laid to rest the idea that interest rate cuts will take place any time soon.
  • RELATIVE STRENGTH FOR THE US ECONOMY: A GLOBAL PROBLEM. As the Fed delays rate cuts, the USD tends to appreciate, which imposes higher-than-expected inflation on the rest of the world, limiting their ability to cut rates. Furthermore, US strong economic performance comes at the cost of an unsustainable fiscal position, which also creates long-term fiscal and financial stability risks for the rest of the world by potentially pushing up global funding costs.
  • IT’S GOING TO BE A“RACE TO THE BOTTOM” warned the ECB President referring to the effect of industrial policies on the global economic environment. They push up production costs, and when everybody subsidises manufacturing all at once (increasingly the case), currency and trade wars ensue. This possible scenario, with its associated onshoring and friend-shoring, leads to much greater volatility and an upward bias to inflation.
  • THE ‘GREAT REVERSAL’. Since 2020, in half of the world’s 75 poorest (‘low-income’) countries where 2 billion people live, per capita GDP growth has been slower than in OECD (rich) countries; and today, of that half, 1/3 have a lower GDP per capita than before the pandemic. Hence the concern expressed at the recent World Bank/IMF Spring meeting of a ‘Great Reversal’: living standards in the poorest countries might never (or at least not any time soon} converge, with those of the rich world. Nand Singh and Lawrence Summers (who preside over an independent expert group commissioned by the Indian G20 Presidency) describe “2022-2023 as a disaster for global development” and warn of “a world (being) on fire” unless action is taken. Action means an additional spending of about $3tr per year by 2030, of which $1.8tr in additional investments in climate action (details HERE). Barring this, expect more humanitarian crises, more political and geopolitical turmoil, and more immigration (hence more populism in the rich world, even if it’s a net positive economically).
  • AN ECONOMIC NO-BRAINER: When dealing with climate policies, the cost of action is high, but that of inaction is much higher. New research estimates that the cost of environmental damage will be six times greater than the price of limiting global heating to 2C. By 2050, the effects of climate change (without accounting for extreme weather events) will reduce global incomes by 19%, or $38tr per year, compared to what they would have been without the climate crisis. The impact will be disproportionately severe on those least responsible for climate disruption, with an average income reduction of about 11% in the US and Europe, while in Africa and in south Asia it will be 22% – further worsening inequality. Most statistics about the economic consequences of climate change normally account for high-value insured assets in rich countries, but the harder to measure cumulative and interrelated consequences like lost productivity, negative effect on mental and physical health, and severed supply chains are much more consequential.
  • UKRAINE IN A CRITICAL STUATION. The new US $61bn package for Ukraine comes belatedly (with a 6-m delay); at a time when the country is facing a major challenge on the battlefield, and when Russia is intensifying drones and missiles strikes on critical Ukrainian infrastructure and cities (like Kharkiv). Increasingly, the war in Ukraine resembles a proxy world war. The US and the West overtly support Ukraine while a new Axis does the same with Russia: Iran and North Korea with weapons, and China in a more covert and limited manner that beefs up Russian military-industrial complex. Zbigniew Brzezinski saw this coming in “The Grand Chessboard” (1997) when he warned about an “antihegemonic coalition” led by China with Russia and Iran, united not by ideologies but over grievances about the US – West’s primacy.
  • GLOBAL REARMAMENT ON STEROIDS. Last year’s global defence spending amounted to a record $2.4tr – a 6.8% increase in real terms from 2022, noticeable in all regions of the world. It is poised to rise further in 2024, making defence and defence-related industries an enduring investment theme. The relationship between defence spending and GDP is not straightforward, but the following is certain: the upcoming surge in defence budgets, with its associated industrial – trade policies, (1) is inflationary, (2) poses complex public policy trade-offs that require a new fiscal paradigm (guns versus butter), and (3) is politically / socially divisive in Western democracies – a particular nightmare for European politicians.
  • CANARIES IN THE MINE. Four ‘random’ observations that can be seen as not-so-weak signals. (1) Microsoft warning of AI-fuelled chaos in the forthcoming elections. (2) JP Morgan’s warning that the world’s needs a “reality check” on its move from fossil-fuels to renewable energy and Unilever scaling back on its environmental and social pledges – symbols of backpedalling; (3) “Sogflation” (too much water) and “heatinflation” (too much heat) affecting crop yields and generating food inflation (like UK potato prices, up 81% Y-o-Y); (4) Demonstration ‘cascades’ on US campuses against Israel’s war in Gaza, with potential to propagate and affect electoral and social outcomes.
  • For an in-depth proprietary analysis of any of the bullet points and what they mean for you – please contact us. We provide tailor-made, independent research, with insights and actionable ideas based on a rich and diverse network. Details HERE.