February’s Inside Track

  • The world economy is on the verge of something unprecedented: a global slowdown led by China, not the US. It is now inevitable that the coronavirus will badly dent Chinese GDP in Q1, and possibly Q2. As today China accounts for about a fourth of global growth (a larger share than the US, Europe and Japan combined) the effect of this will be felt globally.
  • The coronavirus has now reached almost 50 countries and the economic risks have increased accordingly, although the ultimate global economic impact remains unpredictable. The only certainty: the market consensus (that broke on Feb. 25th) that the epidemic would be contained by early April, followed by a V-shaped recovery, now looks like an overdose of wishful thinking. At the very best, the concerns with the epidemic will fade out during Q2 (either because the infection rate is receding or because we’ll learn to live with the virus), followed by a U-shaped recovery. Another plausible, more likely scenario: the virus will trigger a global recession – the longer the epidemic lasts, the more it spreads, the greater the risk.
  • As human beings, we are bad at assessing risks: we overestimate unknown risks and overreact to highly publicized ones (like for the coronavirus) and underestimate risks that we voluntarily assume (like driving a car or eating junk food). At the moment, we are grappling with the cognitive dissonance between the public health measures (exceedingly strict to prevent the health system becoming overwhelmed) and our individual risk (exceedingly limited except for cases of immunodeficiency). We are also exposed to an infodemic: the social media and information frenzy are fanning the flames of our ancestral fears about pandemics and re-igniting the search for scapegoats (normally the “foreigner”). When this is over, the global landscape will be slightly, but significantly different. Apart from the substantial economic cost, deglobalization will have advanced and the decoupling of China and the West accelerated.
  • Too many pundits mischaracterize the epidemic as a black-swan event – which it is not. For years, international organizations like the WHO, institutions like the WEF and CEPI and individuals like Bill Gates have been warning us about the next pandemic risk, even specifying that it (1) would emerge in a highly populated place where economic development forces people and wildlife together, (2) would spread quickly and silently by exploiting networks of human travel and trade, and (3) would reach multiple countries by thwarting containment. Other potential adverse shocks mis-categorized as black-swans range from wars (like between the US and Iran, or in the Middle East or the south-China Sea) to political and social chaos (like post-election in the US). None are unpredictable per se – it is their propensity to create perfect storms when they conflate with other risks that takes us by surprise.
  • Many industries and businesses are being hit hard by the coronavirus. For some, the pain will be acute but transient, like for the global conference business – valued at about USD2-2.5tr in 2018 and growing at roughly 10% per year. In our estimate, an overwhelming majority of events planned between now and June are being cancelled, with economic losses extending beyond the event itself. For others, the current pain poses existential questions. A notable example is the until-very recently fast-growing cruise industry. Already beset by acute environmental issues, it now risks being seen as a provider of seaborne petri dishes.
  • De-growth used to be an idea of lunatics’… Not now! Increasing concerns about the environment and climate emergency are questioning GDP growth orthodoxy. Not only is consumer driven de-growth emerging with force (less meat, less flights, less consumerism generally), but also a still small but rapidly growing movement is gaining traction among businesses and investors. Companies and strategies that favor reparable products with longer lifespans (from phones and cars to fashion) or that even offer free repairs (Patagonia outdoor wear), and platforms for trading used products are bound to benefit.
  • A few recent telling signs corroborate our long-standing conviction that the sustainability trend is not only inevitable but so is its acceleration: (1) BP’s commitment to net zero by 2050 “or sooner”, preceded a few days earlier by Lundin Petroleum’s announcement to become carbon neutral by 2030! (2) Ilmarinen’s (Finland’s largest pension fund) USD600m investment in an ESG ETF managed by BlackRock. (3) A group of Wall Street titans endorsing the Carbon Dividend plan of the Carbon Leadership Council. (4) Deloitte forecasting that ESG funds will represent half of US professional AUM within just 5 years… We could go on! For all these, the devil is in the detail, but count on activists and new research outfits to monitor closely and report on what’s happening.
  • A ground breaking new scientific report puts the global value of the yearly decline in natural assets (measuring only those biological, not physical) at USD479bn, which in turn suggests that reversing nature loss or adjusting to it (when it’s too late) must become an economic priority. Drastic changing weather conditions in the Alps are just one more proof that “business-as-usual” is dead in the era of accelerating climate change. Much warmer temperatures than average are forcing ski resorts to ponder what to do when the natural asset that underpins their business (snow in winter) is disappearing. They are not alone.
  • The recent Munich Security Conference, saw an emerging polemic over “Westlessness” – the idea that the West is uneasy, hopelessly divided and challenged, not only by the rise of China but also by its own internal bickering. A further concern is Germany’s weakness and contingent doubts about its role as a pillar of European stability. Following the resignation of the CDU’s leader (and Merkel’s chosen successor), German politics is in disarray. Meanwhile, Germany, that exports more to China than even the US, is the European country most vulnerable to a Chinese slowdown.
  • Boris Johnson got Brexit done, but no one knows exactly what this means. The UK has entered a transition period during which a no-deal (i.e. a hard exit on WTO terms) or limited deal with the EU are still all too conceivable (the latter would entail endless negotiations in all the sectors not covered by an initial agreement). For business, this means as much uncertainty as before. download the full report The Inside Track February 2020