Democracy and market efficiency. Fiscal sustainability and political risk. The far right on the rise in Europe. Confidence is fundamental – and fickle. The global economic and geopolitical impact of the US elections. Extreme heat is bad for growth. Some Chinese HNWI are on the run – with their money.
- ELECTIONS – DEMOCRACY AND MARKET EFFICIENCY STILL MORE OR LESS ALIGNED. Elections just took place in four ‘big’ democracies: India, Mexico, South Africa and the EU. In all four, incumbents remain in charge, but constrained by the necessity to rule in coalitions (in India, South Africa, and partly the EU; not so in Mexico). This will ultimately prove good for their economies and markets. Establishing a causation between political liberalism and GDP per capita (the former having a positive effect on the latter) is hard, but in the long term, there is some evidence that democracies are more conducive to growth, and therefore more market-friendly, than autocracies, China notwithstanding. The reason: free and fair elections force democracies to be more responsive to the needs of their populations. Come to the next Summit of Minds to explore this issue in greater depth.
- BUT: FAR-RIGHT ON THE RISE IN EUROPE. At the overall EU level, the political centre has held (keeping its majority in the EU parliament) but the far-right gained considerable momentum in France and Germany, crushing the political mainstream. Everywhere in the rich world, the trend is similar: far-right parties are benefiting from the fact that the political status quo and the political centre are associated with wage stagnation and rising inequality at the bottom and middle of the income distribution. Without changes to achieve a system perceived as fairer, political risk and volatility will continue to increase inexorably.
- FISCAL SUSTAINABILITY EXACERBATING POLITICAL RISKS AND VICE-VERSA. The spread of French 10-year government bonds over German ones has roughly doubled since Macron called for a snap election (from 0.4 to 0.8%). The contest between the far-right and the hard-left, with the possibility of a hung parliament, might see it increase still further. With a debt to GDP ratio at 110% and government expenditure hovering around 58% of GDP, the future French government will have very little room for manoeuvre. Painful choices will be required while concerns about debt sustainability will be mounting. Populist promises to cut taxes (the far-right), to boost public spending (the hard-left) and to reverse the rise in the retirement age (both) will have to be abandoned. Market forces plus the institutional discipline imposed by the EU will work to prevent reckless decisions (Frexit won’t happen), but the opposition to climate policies and immigration will become mainstream and progressively normalised.
- CONFIDENCE: THE NAME OF THE GAME. Ultimately, debt sustainability boils down to confidence. Put simply: overleveraged economies remain stable as long as people remain confident in their futures. When this ceases to be the case, a crisis can hit very rapidly. Confidence – which consists in having positive expectations of future events – is fickle and in increasingly short supply in many parts of the world. Shifts can occur suddenly – yesterday’s result of the French parliamentary elections is proof of that. Crises are often simmering under the surface until they erupt, like in Hemingway’s “The Sun also Rises”: “How did you go bankrupt?” asks one character. “In two ways: gradually, then suddenly”, responds the other.
- THE US ELECTION AND THE GLOBAL ECONOMY. Last month, the question was whether Joe Biden would beat Donald Trump. Now, following the debate debacle, it is whether Biden should run at all. Betting markets are predicting a wide Trump victory, which could wreak havoc on the US and the world. No matter which way you look at it, Trump’s programme (1) to cut taxes when the budget and the deficit are on such an unsustainable path, (2) to limit the independence of the Fed and (3) to possibly replace income tax with tariffs makes no economic sense. The latter is an arithmetic impossibility: tariffs are levied on imported goods ($3.1tr in 2023) while income tax ($2.6tr collected in 2022) is levied on the roughly $20tr+ of annual incomes. His plan to disengage from the global economy by imposing a 60% tariff on imports from China and 10% on imports from the rest of the world would (1) disrupt global trade, (2) generate US inflation, and (3) affect the ‘average’ US consumer. It would trigger a recession, or even a depression.
- THE US ELECTION AND GEOPOLITICS. In the US and elsewhere, officials and analysts alike worry about America’s fractures and political dysfunction, with concerns mounting that it will lead to an increase in security threats. At a time when Western resolve and its capacity to dissuade and deter are being increasingly challenged and tested by China, Iran and Russia in the South China sea, the Middle East and the Baltics, the risk of an accident, including the possibility of a war, becomes a distinct possibility. Risks of miscalculation abound, but the fact that a conflict is likely doesn’t make it inevitable. That said, it’s unlikely that financial markets will go on keep discounting geopolitical risks as they currently are.
- EXTREME HEAT: BAD FOR GROWTH. 2023 was the planet’s warmest year on record in the last 100,000 years, and 2024 is set to be even hotter. Two weeks ago, 1,400 high temperature records were registered around the world. Extreme heat is now routine, with heat waves getting hotter, longer, deadlier and costlier. Its effects on industries like agriculture (lower yields) or tourism (displacement to cooler destinations) are well understood, but its broad, pernicious economic repercussions on growth much less so. A plethora of new research shows that extreme heat reduces labour productivity and increases operational costs for firms. Most notably, a correlation exists between extreme heat and increased delinquency rates amongst companies, particularly SMEs.
- A CANARY IN THE COALMINE: Runxue – or running away with your money. Last year, 14,000 wealthy Chinese left the country for greener pastures. This year, more than 15,000 will make the same tough decision to embark on a road littered with obstacles (taking money out of China is an arduous process). When private entrepreneurs decide to leave their homeland en masse, take it as an unmistakable early-warning sign that the country is about to get into real trouble.
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