This week’s edition examines the major geoeconomic and geopolitical shifts that are underway in a new era of global volatility. We start by reviewing global demographic trends, where wealthy countries and developing countries have divergent futures. We move into the alarming state of the Chinese economy and how Beijing may pull policy levers to stimulate it. We then examine the disturbing increase of extreme weather that comes with climate change and the problem with assessing its risk, and we end by assessing fears of de-dollarization.

Demographic Shifts and Their Impact

Demographic Shifts and Their Impact

How a Vast Demographic Shift Will Reshape the World

Lauren Leatherby, The New York Times

Global Trends

UNHCR – The UN Refugee Agency

Demographic shifts signal significant economic and societal change the world over. In many developed and wealthy countries, the percentage of citizens above retirement age (65+) is set to rise drastically, with some European and East Asian countries expected to see as high as 40% of the populace in retirement. While those trends are weaker in countries like the US and Australia, both countries are still slated to see a drastic rise in retirees. Analysts argue that rich countries will therefore need to make policy changes to ensure an adequate workforce. Immigration pathways and changes to pensions and the retirement age are examples of ways to take care of the rising tide of retirees.

In developing countries, the trends are reversed, as the working age population balloons in Africa, the Middle East, and South and South East Asia. This lends itself to opportunity and risk. On the one hand, a large labor force with few dependents has been a boon for countries in Europe, the US, and China, allowing for rapid economic growth and expansion historically. On the other hand, high rates of unemployment, particularly among youth, can lead to significant instability and set countries back on their development path. United Nations (UN) statistics on refugees put the point in full relief, as the number of displaced persons has risen since last year due to conflict in countries like Ukraine and Syria and in countries that have been affected by natural disasters. If harnessed effectively, the opportunity is enormous. Yet, failure to catch policy up with population growth could further exacerbate conflicts.

China’s Fading Recovery

China’s Fading Recovery

How much trouble is China’s economy in?

The Economist

China’s Fading Recovery Tests Policy Makers’ Economic Playbook

Stella Yifan Xie & Jason Douglas, The Wall Street Journal

China’s Economy Is Slowing. Here’s Why that Matters

Bloomberg News, Bloomberg

Chinese growth has proven far weaker than expected, and now analysts are offering suggestions on how Chinese authorities can stimulate growth in the country. While the economy grew 6.3% compared to the same quarter last year, the number is far weaker than meets the eye, as China was still in Covid lockdowns during that quarter. Adjusted, the number drops to an annualized rate of growth at just 3%, which is far lower than expectations. Multiple sectors have proven weak as demand has shrunk in the manufacturing and housing sectors. Additionally, consumer spending is down as anxiety over the Chinese economy has led to an uptick in savings. Worse still is the threat of deflation taking hold as seen in consumer prices holding steady from last year, while producers’ prices are falling.

In response, China has proven highly conservative to date and has cut interest rates a bit while offering tax breaks on the purchase of electric vehicles. The low appetite for significant stimulus stems in part from Chinese concern over high levels of debt, particularly as it is financed by municipalities through local government funding vehicles, which means significant stimulus could turn a debt problem into a debt crisis. Meanwhile, there exists a belief that China will still meet its 5% target without taking large steps to stimulate the economy. Still, many analysts expect the Chinese government to step in, suggesting that a stimulus for consumer spending will go a long way towards combating China’s flailing recovery; a step that would impact not just China, but could benefit growth globally.

Climate Chaos Brings Unforeseen Risks

Record Heat Is Burning Investors and They Don’t Know It

Gautam Naik, Bloomberg

Floods, Heat, Smoke: The Weather Will Never Be Normal Again

David Wallace-Wells, The New York Times

Why people struggle to understand climate risk

The Economist

Extreme weather events have become more common as heat records are broken on a regular basis. For a while, it seemed that these climactic dangers were far from home, but, from unrelenting heat waves hovering over parts of North America to the Canadian wildfire smoke blocking out the sun over New York City, vast numbers of Americans are experiencing firsthand the effects of climate change. Still, many find it hard to understand the risk that climate poses. People, on average, have difficulty assessing risks when there is a great amount of ambiguity involved. The risks involved with climate change, which are a result of a complex mix of environmental factors, policy decisions, and international diplomacy, can be exceedingly difficult to ascertain.

Climate change is also putting pressure on the world’s biggest companies. Analysts say that the world’s largest firms aren’t prepared for the changes to weather patterns that climate change is bringing. The main issue is asset location: Physical assets, such as data storage, industrial plants, agricultural fields, and even public goods like roads, that are located in areas that will see increased temperatures and extreme weather events, are endangered. It doesn’t seem like companies have realized that risk. A voluntary survey sent out to the world’s biggest firms showed that, of the few that responded, only 3 had seriously considered their potential liabilities from climate-related damages. Others simply had generic statements about vague concerns about climate change. It’s estimated that around 90% of the world’s biggest companies are exposed to physical risk regarding climate change. Experts urge them to quickly understand and plan for the catastrophes that could come their way.

Currency, Conflict, and Global Order

Carla Norrlöf, Project Syndicate

Perennial cries of the de-dollarization of the global financial system have cropped up once again in the new post-pandemic era of high inflation, high interest rates, and increased geopolitical volatility. The advent of a new multipolar global currency system, where the dollar is equaled in influence to other currencies such as the renminbi or the euro, is imminent, according to some. There is legitimate evidence of countries lessening their dependence on the dollar; sanctions against Russia for its invasion of Ukraine have blocked it from conducting many transactions in dollars, instead forcing it to craft a patchwork of deals and agreements that allow it to continue trading. China’s increasing importance as a lender of last resort for the Global South has increased the renminbi’s importance. BRICS, the economic bloc of rising economic powers (Brazil, Russia, India, China, and South Africa), has discussed issuing a joint reserve currency to bypass the dollar and other Western currencies. However, data suggests that the dollar’s dominance is relatively stable. Despite fears about sanctions causing diversification out of dollars, they may also encourage diversification into dollars. Additionally, the coalition that participates in sanctions against Russia accounts for over 90% of global currency reserves, 80% of global investment, and 60% of the world’s trade and economic output. In China’s case, strict capital controls and increased state participation in the economy discourage using the renminbi as a reserve currency. The current worries about de-dollarization may fade once again, just as they have the last several times they appeared.