Blog: You, us, everyone

Spotlights are on issues about economies around the globe. Concerns about how to achieve carbon neutrality, if global trade is falling, and globalization have become part of many taxi drivers’ and hairdressers’ vocabularies.

During the last two decades, we have experienced a number of shocks with ever-stronger intensity and ever-shorter intervals between them. To name only a few, we’ve had: GFC, a European debt crisis, a commodity crisis, Brexit, the US-China trade war, the pandemic, the war in Ukraine, and now we are most likely heading towards a demand-supply driven recession. All these have put the global economic and financial system at the brink.

For the last 60 years, corporate leaders and policymakers have worked hard to lift millions of people out of poverty. That was possible because economies and financial systems started operating on a global basis. Depending on where you are, perceptions of the benefits may be perceived differently. While DM enjoyed a nice ride with ever cheaper and better performing products, the price to pay is a loss of manufacturing capacities (read jobs) while EM gained on manufacturing capacities and cheap technologies. The price tag is general pollution (lacking waste management, air, and water, amongst others) and rampant corruption. Yet, an ever-increasing part of the population is questioning the concept of globalization; clear manifests of the latter include the resurgence of the far left and right parties, UK’s Brexit vote, and the trade war initiated by the US under the Trump administration. These developments have highlighted some of the weaknesses and vulnerabilities of the modern supply chain world. The war in Ukraine and the pandemic just made it more evident.

Global trade is not dead as there is no rollback possible. But research suggest that global trade will evolve more based on government-based rules, while in the past the balance was more in favor of corporations. Up to now, governance was providing top-down guidelines with a relatively large flexibility at a macro level. In the future, it can be expected that guidelines and procedures will impact more than ever the granular levels of the economy. In a way, one can argue that the capture of trade based on maximum benefits for all involved parties is closed.

We note that efforts in this respect are made in both blocs. In Asia, and in particular China, governance is taking shape to realign corporate success with government interest. One of the most prominent victims of this development is Jack Ma, founder of Alibaba and owner of the FinTech company Ant Group Co. The sudden cancellation of Ant Group’s IPO is evidence of more stringent compliance. Alike for EM, numerous examples could be mentioned for DM where better and more compliance is implemented in a more silent manner. Governance and compliance are progressing within both blocs in a rapid manner, and only high-profile cases get public attention. Corporations try to remain noiseless on newly implemented restrictions.

The good thing is that compliance efforts will secure supply chain diversity, shorter lead times, and better consumer protection. On the back of this, one can expect that productivity growth will increase and inflation will remain high because of wage growth to cover the newly acquired competences—but after all, overall changes will be very small. We would expect that work-related migration will slow down, and the overall job market will become less fluid. Finally, because of its trade denomination, the US dollar will remain the dominant global currency and the US financial system will continue to provide the financial backdrop for the world economy. We note that currencies such the CNY, the EUR, the BRL, or even RB have their attractiveness, but they are lacking international acceptance or are trading with restriction. These restrictions, be they political or system-based, are not expected to be lifted any time soon.

The compliance-driven fracturing will have an important impact on how corporation will operate and where they will operate, and how flows will go. In DM, major ramifications shall be expected in sectors such as pharma, technology, and industrials. Geopolitical considerations will impact the decision-making process and ultimately the business model. In contrast, in EM the impact will be substantially lower. While they may no longer benefit from DM technologies, the fact that they are emerging and still busy with building a more modern society means the adaptation and implementation of their own technology will lead to an embedded growth benefiting these nations over the longer term. Obviously, as these nations evolve their growth rate will slow too.

Obviously and without a doubt, the world of tomorrow will be different for most economies when compared with previous long-term forecasts. Today, the China-led alliance accounts for about 25% of global output, which is up from 10% some 25 years ago. In the absence of reduced international exchange, this global output will probably fall back to a much lower level. But still, as long as the two blocs hold, a partial roll-back of international exchange will gradually evolve to a new standard.

It probably would be in no one’s interest to see these two blocs split into multiple smaller groups or the rapid emergence of a strong and independent alternative power (for instance India, Brazil, or Russia, amongst others). If so, common goals to achieve CO2 neutrality, partial or full decoupling from fossil energy resources for transport, and shortening the long supply chains, amongst others, could become impossible to achieve. In an extended manner, the economic system built and cultivated for the last 200 years could come to an end as financial stability could destabilize the global order and make it fall—but, this is just a hypothetical projection.