A Review of the Most Important Global Events in September by Monthly Barometer
- The global economic outlook is best summed up in the word “precarious”. Why? (1) Projections for global growth are being lowered – to marginally above 3% for this year and 2015 – by both international financial institutions and banks (2) Central bankers now acknowledge publicly that they alone cannot solve the world’s economic problems, and (3) More and more policy-makers and market participants worry about mounting excesses in financial markets.
- The Monthly Barometer’s consistent argument over the years that we are destined to live in a world of lower growth and greater social fragmentation, in a global environment characterized by chaos and uncertainty, has often earned us accusations of excessive pessimism. FALSE! We adhere fully to the notion that against all historical benchmarks, this is a golden age… but with commensurate rising expectations. Although most of the world has never had it so good, the formula “happiness = reality minus expectations” shapes human perception. We affirm that in high- income countries, societies can adapt to lower GDP growth while maximizing individual wellbeing. A lot of what we consume is unnecessary…
- Our rather “bearish” view of the economy is premised on common sense: the debt super-cycle came to an end in 2008, but most of the world remains over- leveraged. Being over-leveraged is not an economic sin when debt is being used for productive investments such as education or infrastructure. However, when over-leverage serves the purpose of material consumption and real estate acquisition, it invariably ends in tears.
- Ubiquitous claims that the global economy is deleveraging are wrong! So much so that global debt/ GDP just reached a new high at 215% at the end of last year – from 162% in 2000 and around 200% at the beginning of the “great recession”. With the notable exception of financial sector debt that has gone down, public sector debt has increased in high-income countries and private sector debt has increased in emerging markets (EM). The point is this: in the context of lower global growth and slowing or very low inflation, an increase in leverage is bound to drive many countries into a debt trap. The two regions / countries most at risk are (1) China and (2) southern Europe.
- Decision-makers in charge of monetary policy are confused! To grasp why, let’s sneak a look into one of the world economy’s main “control rooms”: the Fed. On a regular basis, the members of its committee show on a “dots diagram” where they think the federal-funds rate will be in the future. For the end of next year, their opinions diverge from near 0 to 3%. For the end of 2016: from 0.25 to 4%! No surprise that the markets are confused as well…
- Since May,the € has depreciated by almost 10% against the $. This is exactly what the Eurozone needs to fend off deflation and regain some competitiveness. The fact that monetary policies in the US and Europe are set to diverge (tapering in the US, loosening in Europe) heralds a new era of currency volatility and $ strength.
- New research sheds light of why the deceleration of growth in EMs will structurally affect growth in high-income countries. The IMF predicts that EMs as a group will grow by about 5% going forward (versus 7% before the crisis). This reduction of 2 percentage points should trigger a reduction in growth of 0.5 percentage points in the rich world. At the macro level, it will entail a reduction in non-food commodity prices and an increase in EM non-performing loans.
- An important insight to understand why power laws dominate today’s world: between 2010 and 2013, the US mean income rose by 4% – to USD 87,200 per family (good news). However, during the same period, the median income fell by 5%, to USD 46,700 (bad news). This discrepancy between mean and median is due to the fact that the income surged by 10% (to USD 397,500) in the highest percentile of the income distribution. This tells us two things: (1) computing for average is a fool’s errand; (2) thinking in linear terms makes no sense. And let’s not forget that power-law distributions have an amazing ability to produce perfect storms: low probability – extreme consequence events.
- The recent Scottish referendum in the UK epitomizes the forces for devolution at play in today’s world. It is also a symptom of the crisis of democracy and representation engulfing rich countries. The growing disconnect that exists between citizens and their elected leaders expresses itself though fragmentation, disengagement and doubts about the benefits of globalisation. Decentralization of power and retrenchment are very much in the air du temps…
- Anecdotal evidence shows that climate change is increasingly being “strategized” and affecting long- term investors’ decisions, particularly among UHNW investing in land and real estate. As extreme weather- events, such as floods, droughts and storms, progressively become the norm, regions most at risk (many coastal areas) will suffer, while safer places and climate “refuges” (like Alaska) will benefit.
- Ebola has crossed the threshold beyond which infection outpaces containment – spreading exponentially. Plausible outcomes for the epidemic range from “benign” to “terrifying”. Different scenarios produced by the WHO, CDC and published in various research journals predict that the current epidemic could either end by January 2015 or swell to 1.4 million in the next few months, becoming endemic across the region. The latter would devastate the economies of Western Africa and could lead to their complete societal breakdown.
- The struggle to deal with Ebola,IS(IslamicState)and climate change have one thing in common: a failure of co-ordination, or of imperfect co-ordination too late. The problem of a world devoid of global governance is amplified by the “general institutional decay” that Fukuyama describes in his latest book.
- The major “must-watch” issues that will affect investors’ and decision-makers’ sentiments over the next month(s) are – in no particular order: (1) the slowdown – or burst – in Chinese property prices; (2) Fed’s tapering and its “unintended” consequences – particularly for EM; (3) deflationary pressures in the Eurozone; (5) the US currency risk in EM corporate debt; (6) geo-political tensions in East Asia, in the MENA region and on Russia’s borders (with a particular mention of the impact that the demonstrations in Hong Kong might have on China).
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