• March heralds the return with a vengeance of geopolitical risk. The Ukrainian crisis, the rise of secular tensions in much of Asia, sectarian and civil strife in the “arc of instability” that stretches from Western Africa to Central Asia, social unrest in several emerging economies: when considered individually, all these crises seem containable and unable to create a systemic risk. However, when aggregated and conflated, they paint a more disturbing picture, which illustrates a gradual move towards a tipping point and suggests that geopolitical risks are “underpriced” (as stated by El-Erian) by the markets.
  • The Ukrainian crisis is an apt reminder that geopolitics is all about “who can do what to whom, where”. Despite all the talk about technology rendering the world “flat” and creating a global civil society united by common values, geography is still what ultimately matters. Napoleon’s words – “policies of all powers are inherent in their geography” – still apply in today’s world.
  • Eurozone activity continues to expand – for an eight consecutive month, but at a snail’s pace. It is constrained by moribund credit creation. Worryingly, credit is barely available in the countries that need it the most – particularly southern Europe where SMEs, which account for about 80% of employment, are almost entirely reliant on bank finance.
  • Japan combines the world’s highest debt (227% of GDP last year) with the world’s lowest borrowing costs (10-y bond yields at 0.6%). How long can this last? In a perverse way, PM Abe’s apparent victory in beating deflation may end up with fiscal chaos as his policies compound Japan’s monumental public debt before they succeed in igniting nominal GDP growth. If inflation were to take off, interest rates would spike and Japan would default on its debt. Even in a more benign scenario, however, it is hard to see how the country can ultimately avoid debt restructuring.
  • This year, 40% of the world’s population in 23 emerging economies goes to the polls – most notably in India, Brazil, Indonesia, Turkey and South Africa. The combination of lower growth and higher inflation will lead to a rise in political instability. This will in turn exacerbate capital outflows, triggering currencies depreciations and higher interest rates, particularly in the countries that rely the most on more debt and short- term capital flows to bolster economic growth: China, Brazil, Turkey and Thailand.
  • Is China’s “Minsky moment” (when a long period of optimism ends up with an abrupt collapse in asset values) approaching? We’ve warned about it for so many months that we now tend to be cautious! The economy, however, has now lost more momentum that the markets had expected, and debt levels are mounting (corporate debt is above 150% of GDP and total debt stands at 230% of GDP). The more the authorities wait to purge credit excess and overcapacity, the greater the pain.
  • Now that China represents roughly 15% of global GDP (in PPP terms), a Chinese slowdown of even 2-3 percentage points would inevitably entail demand shocks in a variety of countries (commodity exporters and Asian emerging economies to begin with) and a fall in global growth. Today, it is China that represents the greatest downside risk to the world economy.
  • Putin’s swift annexation of Crimea seems like a bold geopolitical victory, but it spells potential disaster for March 2014 Russia – a low investment/high inflation economy highly vulnerable to a fall in oil prices. The reason is twofold. (1) Capital outflows ($70bn for Q1) and investors’ defiance are bound to increase at a time when several reputable Russian analysts predict 0 growth for 2014; (2) Western Ukraine is now “lost” for ever, with a majority of the population incensed by the Russian threat, while traditional allies (those in the Eurasian Union) have become edgy. Problems with Eastern Ukraine will fester.
  • There is at the moment a flurry of sophisticated commentary to determine whether stocks and bonds are properly valued. As always when dealing with highly complex systems, it may be better to revert to simplicity and ask this basic question: is it normal for markets to rise by 30-40% (as the S&P and Nasdaq did last year) when corporate earnings barely budged? Perhaps pause for thought…
  • A variety of recent events vindicate Dani Rodrik’s “political trilemma of the world economy” which says that globalization, democracy and the nation-state are mutually irreconcilable as only two can co-exist at any given time. Things as different as the search for the missing Malaysian airline (in which the Malaysian authorities had to reluctantly surrender part of their national sovereignty), the shutdown of YouTube and Twitter in Turkey (at the hand of PM Erdogan, Turkish democracy retreated a few steps) and multiple instances of a brewing backlash against globalization (further financial retrenchment within Eurozone countries in particular) prove his point.
  • In the constellation of thinkers trying to understand the far-reaching implications of our soon-to-be digitized / robotized global economy, there are roughly two camps: those who believe it will have a happy ending – as in the past, workers displaced by technology will find new jobs; and those who believe it will lead to a progressive social / political Armageddon. Everybody, however, pretty much agrees on two things: (1) technology will disrupt everything in a trend that is inescapable; (2) technology will contribute to greater inequality.
  • The most recent US Economic Census sheds some interesting light on the relationship between technology and unemployment. In a nutshell, it shows that innovations in information and other disruptive technologies tend to raise productivity by replacing existing workers, rather than creating new products needing more labour to produce them. This may prove to be one of the most crucial conundrums of today’s new world: a choice between higher productivity and lower employment (a trend in the US) or lower productivity, higher employment but low wages (like in the UK, where the output per man-hour is now 21 percentage points below the G7 average).
  • In the latest IPCC (Intergovernmental Panel on Climate Change) report, there have been some clashes among scientists about the accuracy of the economic effects of climate change. Behind the silly polemic, the reality is this: although public attention focuses on rising sea levels and extreme weather events, more subtle and less noticeable effects of climate change – such as changing rain patterns in East Africa and large parts of Asia – are having a much more dramatic impact; reshuffling, for example, the cards of global agriculture, and exacerbating in the process societal, economic and geopolitical risks.
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