Low growth and high debt sum up the global economic outlook. The disruptive potential of tariffs. Price inflation and grievances. The BRICS have a new agenda. Yet, geopolitics are still being discounted. US$ remains difficult to do without. The wind has gone out of climate investment. The Japanification of Europe. For sustained growth, institutions still matter – a lot.

  • THE GLOBAL ECONOMIC OUTLOOK IN JUST FOUR WORDS: LOW GROWTH – HIGH DEBT. Confronted with the massive impact of (1) the after-effect of the pandemic, (2) an explosion of geopolitical rivalries and (3) an ever-rising number of extreme weather events, the global economy has proven to be, so far, remarkably resilient. By and large, inflation has been vanquished without significant damage on employment and GDP growth. However, this achievement has come at the cost of loose fiscal policies and thus an increase in public deficits and public debt (this will amount at the end of 2024 to a record of USD100tr). The IMF expects global growth of an underwhelming 3.2% this year and next, provided no shocks occur. A bold, if not unrealistic, assumption. As the IMF Managing Director recently observed: “the unforgiving combination of low growth and high debt makes for a difficult future.”
  • TARIFFS AND GROWTH. One thing could instantly derail the possibility of a soft landing for the global economy: tariffs. More mercantilism and protectionism would (1) increase inflation, and (2) unemployment, and thus (3) reduce growth. If Donald Trump wins the US election, he has pledged to impose across-the-board tariffs of 20% on US partners, and 60% on Chinese imports – all this while pursuing mass deportation of undocumented immigrants and sweeping tax cuts. This would lead to a tit-for-tat trade war, ravaging what is left of the international rules-based order.
  • PRICES, INFLATION AND GRIEVANCES. Central bankers care most about core inflation which excludes the volatile prices of food and energy – both beyond the reach of monetary policy. Conversely, what consumers care most about are the prices of what they consume daily or weekly: food & energy. Today, food prices are respectively 30% and 23% higher in Europe and the US than in early 2021; and rising again, mainly because of the climate. This causes much pain and resentment among those with the lowest incomes. It also makes monetary policy trickier by skewing inflation expectations.
  • THE BRICS SUMMIT: A GLIMPSE OF THINGS TO COME. The group, initially created to challenge a Western-dominated world view, just met in Kazan (Russia). Egypt, Ethiopia, Iran, and the UAE have now joined Brazil, China, India, Russia, and South Africa. All together, they account for 45% of the world population and 26% of the world economy. 34 more countries have expressed an interest in forging closer relations with the current group. The BRICS still lack a coherent agenda, with policies that range from positively anti-western to simply non-western. But its growing clout is indicative of the desire of the global South and the global East to reshape the international order and to redress the global balance of power, thus forcing the West to cede power to the Rest. The take-away: Western investors and business leaders will find it more difficult to operate in emerging markets.
  • GEOPOLITICS: IT DOESN’T MATTER ’TIL IT DOES. At the IMF – WB Annual Meeting, several central bankers publicly worried about thedissonance between valuations and rising geopolitical risks. For some years now, geopolitical risks have been steadily on the rise, with, in many regions of the world, warning signals about worrying developments now flashing red. The prospect of: (1) a NATO without the US – or Europe alone, (2) an Asian proxy war fought by North Korean soldiers in Ukraine (3) an escalation in the Middle East, and (4) a miscalculation in the south China sea, all conflating, are sharply discounted in the C-suite and on trading room floors. The prevailing ‘philosophy’ there: “they don’t matter until they matter.”
  • THE UNASSAILABLE USD. BRICS countries fulminate against the dollar and its weaponization by the US, but they can’t do much about it. Collectively, the BRICS run a large trade surplus which they must balance by acquiring assets outside of the group (mainly in the US). If the US decided to reduce its trade deficit or to impose controls on foreigners’ ability to acquire US assets, it would make it impossible for countries like China to continue running a large trade surplus (the underlying economics is available HERE). Even if many countries are at it, undermining the USD dominance in global finance is very difficult and disruptive, most notably for surplus countries.
  • CLIMATE AND NATURE COMMITMENTS IN THE DOLDRUMS. Except for renewable electricity generation (progressing at an amazing pace), climate and nature commitments are backsliding. As shown in Cali (COP16 UN biodiversity conference) and soon in Baku (COP29 UN climate change conference), companies and policymakers are getting cold feet. Al Gore puts it bluntly: resolutions “resemble New Year’s resolutions: easy to make and hard to keep.” At a time when green investment is more needed than ever, there are only 34 equity funds or ETFs focused on biodiversity (all in Europe, managing USD3.7bn in assets), and USD530bn in climate funds globally.
  • EUROPE’S RISKS SKEWED TO THE DOWNSIDE. In recent months, bad economic and political news have piled up in the two key European countries: France and Germany. Others, like Spain, are doing very well, but overall, there is a feeling that Europe is following a path of ‘Japanification’ (albeit without the social cohesion that characterizes Japan). At the micro level, the deep crisis affecting two key European industries exacerbate this pervasive sentiment of gloom and disenchantment. The automotive industry (which account for 7% of EU GDP and employ 14m people) faces a perfect storm of (1) slowing demand, (2) increasing Chinese competition and (3) a messy transition to EVs. While luxury faces tough times, with sales in China – its largest market – plummeting.
  • INSTITUTIONS: THEY MATTER A GREAT DEAL. Acemoglu, Johnson and Robinson won this year’s Nobel prize in economics for having shown the extent to which societal institutions affect economic development – a fundamental ‘insight’ for long-term investors. In a nutshell, more economically inclusive and politically democratic systems prove more conducive to technological innovation and long-run growth. Strong economic growth is possible under any regime, but inclusive institutions are required to sustain growth over time.
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