• The macro backdrop for the rest of the year is the following: (1) lower global growth (around 3%) than expected; (2) higher headline inflation prompted by oil base effects, but subdued core inflation; (3) sharp deceleration of growth across emerging markets (EMs); (4) weak investment in high-income countries; (5) rising risk aversion and volatility as Fed tightening looms; (6) rising social unrest and political backlash caused by deflating expectations and technological disruption; (7) rising geopolitical turmoil caused by the gradual disappearance of US hegemony and the concomitant rise of multi-polarity.
  • The risk of a global recession provoked by the sharp deceleration of growth in EMs is rising. The reasons are twofold: (1) Two of the BRICs – together accounting for 20% of global GDP – are in recession (Brazil and Russia) while a third (China) is exporting deflation to the rest of the world as it stutters. (2) Having significantly contributed to the growth in global trade over the past 15 years, the 17 largest EMs are now acting as a drag, having reduced world trade values by almost 1 percentage point in Q1 of this year.
  • Bill Gates argues that innovation is taking place“at its fastest rate ever.” This, he predicts, will lead to a “supply-side miracle”, with deflationary consequences for the global economy. Whether one agrees or not with this techno-optimist view, it’s hard to dispute that the digital economy and the low marginal cost society it entails are, in essence, deflationary. There is a growing disconnect between the financial markets and those who think long-term. The former now believe that deflation has been averted, as evidenced by higher sovereign yields. The latter view global trends (not only technology, but also ageing and rising inequalities) as pointing to a deflationary world. “Permanent” low interest rates are a feature of such a world.


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