• Recent economic developments give credence to the idea that the world has entered an era of slower growth and higher unemployment. Surprisingly, this remains a minority view at a time when the US economy might stall, the Eurozone and Japan are struggling with barely any growth and China, like many emerging markets, is sharply decelerating. What underpins our conviction? (1) Structural headwinds, such as global ageing, rising inequality, and over- indebtedness, are gaining strength; (2) In high-income countries, consumers are retrenching, therefore global demand is bound to remain weak; (3) Hysteresis in the rich countries’ labour markets is creating structural unemployment and a lost generation.
  • There are many reasons why in the foreseeable future the global economy won’t return to the status quo ex ante of high growth / low unemployment. One of the most prominent ones is not economic: disruptions caused by geopolitical and societal risks are bound to increase, creating a ratchet effect on global GDP growth.
  • Global aging constitutes a formidable structural headwind. It is now upon us, and will exert a negative effect on economic growth. According to the OECD, the demographic tax imposed by global ageing will knock off 0.4 percentage points of global GDP growth in the next five years and 0.9 percentage points from 2020 to 2025.
  • If just one word were to capture the mood at this year’s meeting of central bankers in Jackson Hole, it would have to be: “confusion”. Economists disagree about what’s happening in the labour markets, unable to determine whether their sluggishness is of a structural or cyclical nature. The immediate implication for the US and the UK economies is the following: central bankers cannot pin point the appropriate timing for a rise in interest rates. Market uncertainty will ensue.
  • Last month, the US labour force participation rate stood at 62.9%, reflecting demographic changes (ageing), but also discouragement (people who stop looking for a job). Solid job growth should not obscure the fact that almost 20% of its population works part-time – less than 34 hours a week. Part-time workers earn less, hence the “bifurcated” US recovery.
  • The growth engine of the Eurozone, Germany, just faltered, with its output slipping by 0.2% in the second quarter. This is happening against the background of stagnation and malaise in France and a third recession in Italy. Most commentators blame the Ukraine crisis, but exports to Eastern Europe and Russia account for less than 4% of total German exports. The problem is structural and entrenched in the country’s lack of investment, which, at 17% of GDP, is one of the lowest in the industrialized world. The German miracle is over.
  • The spectre of deflation is now haunting the Eurozone. This has less to do with economics than with psychology: a return of confidence is what will prompt investors to invest and consumers to consume. This is why only structural reform – i.e. the promise of a better business environment – in the laggard countries such as France and Italy, can lift Eurozone spirits… and growth. Mario Draghi made this point forcefully at Jackson Hole, explaining that supply side and demand side reforms cannot be separated, and subordinating further monetary measures to structural reforms. Courageous, bold and necessary! It will, in the end, make the Eurozone stronger.
  • Over the past year, the Japanese economy has had zero real growth. With real wages still 3% below the level of a year ago and core inflation at 3%, it’s not surprising that household consumption fell in July almost 6% from a year ago. It is difficult to discern from where the resumption of growth can come from. The concern that Abenomics might lead to stagflation is now very real.
  • The Chinese debt to GDP ratio now amounts to 250%. The conviction that it is manageable because it is lower than in most high-income countries misses the point. What matters is the following: the Chinese stock of private credit would normally be associated with a GDP per capita of around $25,000, which corresponds to more than four times the country’s current level ($6,000). It is as such unsustainable.
  • There is a tendency to observe the vast array of geopolitical and societal crises currently engulfing the world as if they were isolated incidents, independent one from the other. They are not. They conflate, amplify each other and delineate the contours of a leaderless world in which no one can enforce order. We’ve entered, in the words of a US academic, the “age of entropy”. As retrenchment, fragmentation, anger and parochialism increasingly define our global landscape, the world becomes less intelligible and more disorderly. For policy-makers and investors, this means that a negative demand shock is never far away.
  • The conflict in Ukraine marks the end of the post cold war world and the true beginning of a world of “hybrid” conflicts, fed by nationalism / irredentism, and in which conventional and irregular warfare blend, together with cyber-warfare. Nobody knows what Putin’s intentions are, but Tolstoy’s “War and Peace” provides a clue. As Napoleon was complaining to emperor Alexander that “the war was being conducted against all the rules”, Kutuzov reacted, “not asking about anyone’s tastes or rules, with stupid simplicity, but with expediency”. The only certainty: this conflict is destined to linger, even if Russia needs Europe more than Europe needs Russia.
  •  The presumption that Russian hackers launched a “patriotic” wave of cyber-attacks against large US financial institutions to avenge US sanctions over Ukraine seems well grounded. This is a harbinger of a new form of asymmetric retaliation. Increasingly, private investors and commercial companies are being “punished” by invisible enemies who transmute international tensions or incidents into operational punishments. Nobody is immune as these hackers are “transactional” operators who can also be recruited for a fee.
  • 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) the possible “cognitive dissonance” between the Fed and the financial markets; (3) deflationary pressures in the Eurozone; (5) the US currency risk in EM corporate debt; (6) geo-political tensions (from a global standpoint, some, such as rising tensions in East Asia, matter more than others, like the Ukraine crisis). For insights and real-time analysis on any of these, please contact us. 
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