A synchronized global recovery is in the making
Much stronger than anticipated a few months ago. This year, barring the emergence of new ‘vaccine-resistant’ COVID-19 variants, the IMF forecasts the global economy to grow by 6% and 4.4% next year.
Consumers will propel much of this growth. Since the pandemic started, they have amassed globally USD5.4tr in excess savings (an estimate equivalent to 6% of global GDP, mostly detained by the wealthier households in high-income countries). As economies open up, demand will surge, releasing some of these excess savings – just one third of the total could be enough to boost global output by 2 percentage points this year and in 2022.
The world economy
This explains the market consensus that expects a repeat of the Roaring Twenties – the 10 years (1920-1929) during which the US economy grew by 42%. True: money that, over the last year, couldn’t be spent on travel, culture, restaurants and many other services will be unleashed all at once, but then what? Either the Roaring 20s will last two years (after which pent-up demand peters out), or businesses’ embrace of digital (globally, 50%+ companies are 7 years ahead of their initial digitalisation plan) will spur a productivity increase sustaining growth. For now, the jury is out.
Behind the headlines and the exciting aggregate numbers, issues are building up. Leaving aside the acute problem of a highly unequal recovery (see below), the world economy is effectively stuck in a debt trap. Central banks can no longer tighten monetary policy without causing (1) a major financial crisis or (2) higher inflation or (3) both. How can they exit from ultra-loose monetary policies? It seems that no one has an answer. But one thing is clear: the longer they wait, the larger the problem becomes.
The so-called ‘Washington consensus’ articulated around fiscal probity has made a U-turn, putting another nail in the coffin of neoliberalism. The proof: at the recent IMF / World Bank Spring meeting, officials called for (1) more cooperation between governments and the private sector (effectively a more activist state); (2) more public spending on public health and education; (3) more fiscal stimulus in rich economies; (4) new wealth taxes and more “recovery contributions” (solidarity surtaxes) from rich individuals and global companies. The underlying rationale for all these: the IMF worries most about (1) social cohesion and (2) divergent recoveries (between and within countries).
These worries will have long-term consequences
In rich countries that could afford an exceptionally strong fiscal and monetary policy response + a fast rollout of vaccines, cumulative growth in GDP/capita is forecasted to be just 1 percentage point less between 2019 and 2022 than in January 2020. Put simply, their economies should emerge from COVID almost ‘unharmed’ (usual caveats apply). By contrast, for the same period, emerging markets (less China) and developing countries should suffer respectively a 5.8 and 6.5 percentage point hit to their GDP/capita growth. This means that 2/3 of the world population will endure a long and painful recovery. An increase in societal and political risks will follow, with reverberations and cascading effects around the globe.
Latin America – where the pandemic has exacerbated pre-existing conditions of inequalities and inadequate public services – offers a foretaste of the impact of citizens’ anger and frustration. A populist wave swept recent elections In Peru and Ecuador with voters venting their fury at the political class that they accuse of having failed them. This bodes ill for the continent’s other major presidential and mid-term elections due before the end of the year. But the rejection of (or lack of faith in) politicians is a worldwide phenomenon characteristic of this era of Global Discontent.
Intelligence agencies concur
Whether in public reports (like the US Annual Threat Assessment) or in semi- and unofficial statements, they paint a picture of a world that is messy, disorderly, fragmented, nationalistic, increasingly belligerent and unwilling to cooperate. Accordingly, issues of national security increasingly permeate the business and investment worlds. Unlike the past this is not limited to FDI and finance, but now also concerns corporate governance, standards and protocols, supply chains and auditing. Few global businesses seem prepared to navigate such turbulent waters and make the appropriate trade-offs.
Yet again, as in preceding months, April showed that net zero commitments are inexorable and rising ever faster. Whether it’s countries making new pledges (like 40 or so during Biden’s Leaders Summit on Climate), funds committing to target carbon removal (like Apple’s USD200m “Restore Fund”) or new global initiatives (like GFANZ – Glasgow Financial Alliance for Net Zero), everybody is at it! By now, most companies and financial institutions understand that the environment and climate change constitute a major systemic risk. This will drive policy for years to come.
Accordingly, despite its methodological and conceptual pitfalls, ESG investment is all the rage. The direction of the trend couldn’t be clearer and suggests that for passive funds, not only carbon-intensive businesses and industries, but also carbon-intensive economies like China (almost 60% of its energy depends on coal) may be at a relative disadvantage going forward.
In previous issues, we referred to some ‘niche’ investment themes that benefited hugely from the pandemic. Ski-touring equipment, bicycle spare parts and nature-related activities like shirin-yoku are such examples. A major one – not so niche anymore – is the humanisation of pets. In the rich world, pet ownership has surged, like in the UK where last year 3m households bought a new dog, or in the US where the pet market rose to USD104bn (110bn expected this year). Dogs and cats are increasingly treated as humans, leading to a ‘premiumisation’ of the market (since early 2020, the Pet Care index has outperformed Nasdaq – about 80% versus 60%). Will this pet mania phenomenon endure? Probably!
Everything that has to do with nature and the natural world is a winner in the post-COVID world. Read the full article by clicking the following link: https://hoving.partners/wp-content/uploads/2021/05/The-Inside-Track-May-2021.pdf
Read also: Inside Track March 2021