Inside Track December 2020

  • Less than a year after entering the pandemic, three vaccines are in sight. This is a game changer, but even so, the next few months are going to be grim in the Western world. What happens next? When the recovery begins in earnest in Q2 of 2021, it will be two-tracked and bifurcated (K). For those in the ‘right’ industry, company or sector, pent-up demand will surge thanks to excess savings accumulated during the pandemic. For the unlucky ones, distress will dominate. In the industries hit the hardest – like hospitality and retail that represent on average more than 20% of total employmentin OECD countries – the damage inflicted by COVID is structural and will take years to repair. In others, like education and real estate, major adjustments will take place.
  • China is coming off better than most from the pandemic. It looks set to grow by 2% this year (it will be negative in all other major economies), and despite growing geopolitical tensions with much of the world, both capital flows (FDI rose in October for the 7th consecutive month) and trade (it just surpassed the US as EU’s main trading partner) are still on the up. Most importantly, private consumption is beginning to replace exports and infrastructure spending as the main engine of growth.
  • By and large, what is true for China is also true for Asia. The continent’s decision to suppress COVID rather than trading off deaths against the economy has proven to be the right one. Asia (with the significant exception of India) is emerging stronger, with empirical evidence showing that the strategy of maximum containment or suppression has resulted in lower mortality and lower economic costs. In the US, by contrast, the total cost of COVID is estimated at 75% of this year’s GDP (USD16tn: the sum of cumulative value of lost GDP + premature death + impairment of physical and mental health).
  • More good news for Asia: the just-signed Regional Comprehensive Economic Partnership (RCEP) brings together 15 nations representing about 30% of the world’s population and output(China, Japan, South Korea + the 10 ASEAN countries + Australia and New Zealand). Despite all its imperfections, it (1) signals Asia’s commitment to multilateral trade integration and (2) solidifies China’s position in the region.
  • The pandemic has unleashed a wave of innovation and proven that many things can be done differently. As an example, we know that in mature markets we’ll travel less and will work more from home. The direction of the trend is certain – its true magnitude is less so. A quick survey among our community (corroborated by Bill Gates) predicts that up to 50% of business travel and 30% of days in the office will disappear. These societal and behavioural shifts will entail huge knock on consequences, like for the banks and bond investors that hold USD3.4tn in commercial real estate debt.
  • The “Zillenials” will exacerbate these changes in behaviour, altering in the process the course of most industries. In surveys published globally, an overwhelming majority of those born between 1996 and 2016 declare that environmental and social considerations will play a defining role in their consumption and professional decisions. Business is being forced to adapt by becoming increasingly “woke” – wading into unfamiliar cultural and social terrain. This adds another layer of complexity for investors and business execs: the younger generation won’t be forgiving for companies that green-wash, purpose-wash and woke-wash!
  • A tsunami of debt is engulfing the world. So far this year, total global indebtedness has risen by UDSD15tr, and is likely to reach USD277tn by the end of 2020 (365% of global GDP versus 320 per cent at the end of 2019). This rising debt burden is hitting commodity-dependent emerging markets particularly hard, devastating their public finances. Two telling examples: Nigeria currently spends three quarters of its federal revenues on debt service, while Zambia just defaulted on its debt – the sixth developing economy to do so this year.
  • There is a lot of chatter about a possible resurgence of inflation in 2021 (in the 5-10%+ range), spurred by monetary expansion and fiscal largesse. Current policies of “low for long” interest rates are necessary to extinguish the fire of depression, but they also carry risks for global financial stability, including future inflation. The current situation in which governments issue debt bought by the central bank could indeed create inflation, but as the example of Japan shows, this is unlikely. First, the risk is proportional to the amount of money involved (central banks seek to create reflation, not inflation). Second, secular forces like ageing, technology, and dampened expectations among youth (like the ronin generationin Japan) put a cap on inflation. So far, monetary policies have been unable to accelerate growth to a desired level. This phenomenon is most likely to persist.
  • This means we’ll have to learn to live with small GDP growth, a reality compounded by loudening exhortations all over the world for de-growth, slow growth, “self-aware” growth and even “new” growth. All differ from each other but possess one commonality: the understanding that higher GDP does not correlate with greater human welfare and social wellbeing. We can have less of it and be just fine because GDP is simply a measure of production that doesn’t take into account the fact that the richer we get, the more we value experience (hard to measure) over ‘stuff’ (the bread and butter of GDP growth). The example of Japan shows that low GDP growth does not preclude rising living standards and social stability.
  • There is ever-rising evidence in business and politics alike that social media and other forms of digital communication are making observable reality and facts irrelevant: we live in the ‘post-truth’ age. Online manipulation and disinformation campaigns have become so pervasive and sophisticated that they can now prevent a country or a company to operate as a cohesive entity. Spreading lies and rumours is big business, and so is searching for the antidote. AI start-ups that track and counteract the power of disinformation are booming – a promising niche in tech. Download the full report: The Inside Track December 2020