• Despite inflation surging in countries like Brazil and Russia, the global economic environment remains deflationary. Leaving aside the big deflationary trends such as aging, weak aggregate demand, stagnating real wages, etc., China is a big concern as its growth deceleration is susceptible to export deflation to the rest of the world. It’s important, of course, to differentiate disinflation from deflation, but equally important to recognize that it’s not necessarily either-or! An economy with around 0.5% inflation (like the Eurozone at the moment) will have many of the problems experienced by an economy with around 0.5% deflation.
  • The reason why the Western middle class experiences such a pervasive sense of dissatisfaction and financial insecurity is the following: a middle-class job no longer guarantees a middle-class lifestyle. Over the past 20 years, the four traditional attributes of middle- class status (education, health, pensions and house ownership) have performed worse than inflation. In the US and the UK, necessities such as education are now priced as luxury. This is why the main engine of demand is spluttering.
  • A strong consensus exists in the markets and the policy-making / analysts community that the forthcoming European parliamentary elections (May 21- 25) will witness an eruption of populism and a crushing ascent of the far right. This is wrong: the risk of extremism / populism in Europe is much overstated. Contrary to common wisdom, the economic and social crisis hasn’t spurred a political backlash. In the countries of southern Europe that suffered the most, the far right even retreated – with the notable exception of Greece. Populist and extremist parties will do well (winning in some countries up to 25% of the votes), but they are too fragmented to have any influence on the political agenda.
  • What’s happening in Spain explains why the Eurozone will eventually emerge much stronger from the crisis. The early signs of a recovery driven by the tradable sector can be discerned through the renewed interest of direct investors – global companies and private equity alike. This is happening because unit labour costs have declined, but – most importantly – also because rigidities in the labour markets have been reduced. Structural reforms are now starting to bear fruit, and soon, Italy and France, will have no choice but to follow suit.
  • To understand why global governance is in a mess, look no further than the recent IMF / WB Spring Meeting. The US Congress still hasn’t passed a bill (whose principle was agreed in 2010) that would allow the IMF to increase its lending capabilities and the share of emerging countries. The BRIC countries, that represent 25% of the world’s GDP, currently have a 10% share of the IMF votes. By contrast, Germany, Britain, France and Italy represent 13% of the world’s GDP, but command 17.6% of the IMF voting shares. There is no chance to co-ordinate policies and solve tomorrow’s economic problems with such atavistic and unfair imbalances.
  • A case in point about the above: the effect of the Fed’s ultra-loose monetary policies on EMs shows what happens when it’s “every central bank for itself”. The absence of co-ordination creates huge distortions as capital flows lead to rising asset prices, an appreciation of the exchange rate and ultimately to an increase in local leverage, making it difficult to distinguish the cyclical from the structural.
  • Some recent research sheds some troubling light on how massive foreign inflows into emerging bond markets render the difference between countries that pursue good policies and those that don’t irrelevant. This is due to the fact that global capital markets focus on global liquidity flows rather than local conditions. With now $10 trillion invested in EMs, they are too big for them.
  • Most discussions about China’s prospects take it as a given that the Chinese leadership is in control of the situation, if not omnipotent. Less than we think. (1) The complexity of running such a large and intricate system in a centralized manner must be overwhelming; (2) The ferocious and potentially destabilising anti- corruption campaign at the top – details about Zhou Yongkang’s alleged corruption expected soon – are an incontrovertible sign of political turmoil.
  • China is poised to become the main beneficiary of the mess in Ukraine. The spat between Russia and the West will not be resolved any time soon. Over the next few months, Europe will do all it can to reduce its dependence on Russian natural gas. Meanwhile, China will attempt to replace Europe as a destination for Russian gas exports while benefiting from full pricing and bargaining power. A net win for Beijing as it will simultaneously reduce its dependence on coal with cheap gas while being in a position to negotiate important technology transfers from Russia.
  • The emergence of the global middle class is one of globalisation’s greatest successes. Its definition varies, but it is commonly accepted that the 2.8 billion people in emerging economies who spend between 2 and 20$ a day compose it. Its expansion is now endangered by the deceleration of growth and the rise in inequality that affect most emerging markets. It wouldn’t take a large negative shock to push back one billion people (those who spend just above $2 a day) below the poverty line, crushing their expectations and triggering in turn social instability and political turmoil.
  • Increasingly, cities trump countries as engines of growth, innovation and ideas. Many mega-cities like Lagos, London or Jakarta have a GDP growing at more than twice the rate of the national average. Clustering effects dictate that the most successful entrepreneurs, designers, investors, scientists, artists etc. outcompete each other to live in specific locations. Consumer demand is being reinforced by herding behaviour and the winner-takes-all principle (rich people, having exhausted the list of must-have consumer goods, end- up focusing on real estate). This explains why the rise in value in the most sought-after urban land is unlikely to reverse any time soon.
  • The combination of technological progress and globalisation entails a dramatic reduction in marginal costs across many different industries. As a result, some sectors, notably media & entertainment, mobility, or travel & tourism, are being dis- intermediated in a very disruptive way. The worldwide uproar between cab drivers and Uber, an app-based car service in which Google and Goldman Sachs have invested, is a David and Goliath fight. The outcome is inevitable, and the emergence of lower- cost, more efficient services a given.
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