The past two and a half years have been extraordinary, and it does feel like the world has and is changing under our feet. During times like these, it’s important to zoom out, especially when our thought process becomes more tuned to what is happening in the immediate
I feel that where we are now is at the forefront of a shift in financial and political change. Shifts are not uncommon, but we have had a good run over the last decade
Aftermath of World War II (1944–46), the period around the oil crisis (1971–73), and the breakup of the Soviet Union (1989–92)
More recently, we have had other tremors from the Asian financial crisis in 1997, the dot-com bust in 2000, and the global financial crisis in 2008. Most of which were largely contained in a region or sector
What we have faced over the last few years is a supply-side crisis, inherently physical rather than psychological, against a backdrop of a shifting geopolitical landscape
Maybe it feels worse, as it has followed a 30-year era of relative calm, where we have become used to a World with multipolarity (alignment regionally and ideologically)
Years of relative moderation in international politics seem to be giving way to more political polarisation between blocs
Across technology platforms, the key drivers of the most recent era’s digitisation and connectivity seems to be approaching saturation. Instead, we may need to get used to a new set of potent transversal technologies, particularly artificial intelligence (AI) and bioengineering
Demographics are changing, our prior young world will evolve into an aging, urban world, where inequality within countries may increasingly challenge the social fabric
Economies will experience recession in the coming months, some more than others. Again, these are not a new phenomenon, but nonetheless, they are tough for investors and need strategy to traverse
Let’s go back a bit
The early 1970s bore witness to seismic shifts in the global order (1971–73), particularly as the shift to regional self-determination created tensions in a now international resource system.
- In 1973, an oil shock contributed to a year-long recession that hobbled large and heavily oil-dependent Western economies when Organization of Petroleum Exporting Countries (OPEC) nations sought to leverage the power of what lay beneath their earth
- There was increasing strain on the peg to the US dollar and its convertibility to gold. The gold standard ended when US President Richard Nixon suddenly closed the gold window, and the age of fiat money began
- The West underwent an inflationary recession, and momentum shifted toward the East
- Japan’s GDP overtook Germany’s
- The remainder of the 70’s & early 80’s, was a tough one as people and companies struggled to adjust to a slowdown and persistent inflation, shifting from the rapid growth of the preceding years
- The United Kingdom required a $3.9 billion bailout from the International Monetary Fund in 1976
- Countries such as Japan emerged as economic powerhouses but not geopolitical ones
- Inflation hit double digits, most economies suffered from recession and high unemployment; towering interest rates were used to try to tame inflation, and the gold standard ended
- Productivity growth in G-7 countries more than halved, from 4.3 percent in the 1960s to 1.8 percent in the 1980s
- GDP growth in East Asia started on a long upward trajectory
- China’s transition from a planned economy to a market-based economy starting in 1978, switching from low growth to hypergrowth
- The foundations for a more deregulated market-based economy had been laid in the West, exemplified by the policies of Reagan and Thatcher
Global supply chains spread rapidly, built on cooperative economic rules, supported by the newly formed World Trade Organization, which fostered multilateral reductions in trade barriers
Total trade grew to the equivalent of, on average, 56 percent of countries’ GDP in 2019
Era of the Markets
From 1990 to 2008, trade grew at almost double the pace of GDP. China’s role in trade became truly global. China is now a top-five import or export partner for economies accounting for 99 percent of global GDP by 2019, 67% of the world’s population had a mobile phone, 54% had access to the Internet
Compare this to landlines, which peaked at two for every ten people globally, easily eclipsed by internet protocol and mobile-based technologies
The march of urbanisation has led to an additional two billion people living in cities, meaning city dwellers outnumber those living in rural areas (56% of the global population is urban)Most of all, this period will be remembered for low interest rates and low inflation
This has also helped a record build-up of household, nonfinancial corporate, and government debt, which, on average, by 2020, accounted for 256% of each country’s GDP, up from close to 100% when countries left the gold standard
The global financial crisis (2008) was a midpoint breather in the leverage race, but ultimately the massive monetary expansion in response kept fueling long-term asset values and debt.
So, what next?
A demand cycle is driven by psychology, a supply cycle is physical and takes much more time and effort to resolve
Given that the average CEO would have been a teenager during the 1970s and 1980s, it is unlikely that many of today’s leaders have a playbook for how to navigate this confluence of forces and the unresolved questions that need to be negotiated.
- New dimensions of semiconductor innovation may extend advances in computing power. A deceleration in hardware innovation may lead to greater emphasis on software development
- While smartphones will become the norm even in the least developed countries, global volume growth will end as demand falls in the West (smartphone shipments have been in decline globally since 2018)
- Moving to transversal technologies, such as applied AI (Artificial Intelligence), bioengineering, and immersive-reality technologies, are attracting tens and hundreds of billions of dollars of annual investment, often with double-digit investment growth rates
- Developments in quantum computing may spur the next big S-curve of development
- In the digitally saturated world, frontier technologies such as the metaverse will begin to enter the mainstream
AI in particular, has a wide range of potential applications, which some claim will underpin a Fourth Industrial Revolution. AI innovation, as measured by AI-based patent applications, grew at a rate of more than 75 percent a year between 2015 and 2022
Technology may move to the forefront of geopolitical competition and power, permeating virtually every sector of the economy, determining competitive dynamics. At a time when geopolitics are shifting in unpredictable and potentially challenging ways, this makes strategic autonomy on critical technologies an ever more salient topic
- A race for AI primacy between major powers is under way, with many recently questioning the belief that the United States leads its peers
- There is competition for influence in global standard-setting bodies; consider, for example China’s ambition to take a more leading role through the China Standards 2035 strategy
There are concerns about the security implications of globalized hardware flows as well as the selective block on exporting the world’s most sophisticated chip-making machines, produced only by a single company in the Netherlands
- Cyberattacks as a tool of state power have increased. Between 2020 and 2022, 320 state-sponsored cyberattacks were publicly reported, nearly as many as in the full decade prior
Looking at the next decade & beyond
The world is aging as never before as a result of declining fertility and rising life expectancy. Globally, the world has reached the plateau of “peak child”
*it is unlikely that there will ever be many more under-fives alive than there are today*
This is not confined to the West, in China, for example, the working-age population is already falling, and the old-age dependency ratio is projected to surpass that of the United States in the next 15 years
Africa, conversely, will be the source of more than half of global population growth in the coming decades. By the early 2030s, the continent is expected to have a larger working-age population than China or India
- The world will continue to urbanise. In 2021, the world hit “peak rural”—all future population growth is projected to come from urban centres, as rural populations decline
- North America is projected to gain 13 large cities by 2035, Africa and Asia are expected to gain about 50 and 100, respectively
- Spending on fossil fuels will shift to spending on replacing them, but overall investment may struggle to keep pace with growing energy needs. The near-term energy landscape will be shaped by recent underinvestment
- Spending on renewables would need to ramp up at four times the 2015–22 rate to be on the path to net zero. Oil drilling has not responded to recent high prices as markedly as in the past, likely due to concerns about fossil fuel investment
- A combination of underinvestment and catch-up investment in both renewable and fossil fuel energy infrastructure could produce a prolonged period of higher prices. Even before Russia’s invasion of Ukraine, the deeper trend of underinvestment manifested in tremors in the form of high price signals across energy commodities in late 2021
- Critical resources for the future economy, including minerals and food, may become increasingly important in economics and geopolitics. In recent years, supply-demand imbalances for critical minerals, such as cobalt, have radically changed price signals and driven substitution and innovation
- To meet demand for copper and nickel alone, an estimated $250 billion to $350 billion cumulative capital expenditure may be required by 2030
- Estimates suggest that to enable 50 percent fleet replacement with electric vehicles by 2050, consistent with a net-zero scenario, global production of lithium and cobalt would have to increase approximately 20-fold, and nickel 30-fold
The environmental and social toll associated with some of these developments poses yet another hurdle to many potential projects, few want the mine that provides the necessary minerals to be dug in their back yard
Key grain crops are perhaps surprisingly concentrated in just a few breadbasket regions. The top ten grains exporters accounted for about 70 percent of global exports in 2019.
The Middle East and North Africa region, for instance, relies on imports for 60 percent of its grains (and wheat largely comes from Ukraine and southern Russia). Moreover, key fertilizers are highly concentrated in just a few producer countries. In the case of potassium chloride, which accounts for most potash fertilizer, about 80 percent of exports originate in Canada, Russia, and Belarus.
New & growing investment opportunities
Looking for a source of optimism is that many breakthrough technologies are moving from science fiction to reality, there is the building of small modular nuclear reactors; the first US final certification of such a design is likely to be issued this year
- The CRISPR gene editing tool is migrating from lab bench to bedside in order to tackle cancer and genetic disorders such as sickle cell anaemia and thalassemia
- The Netherlands has developed an effective nurse-led model of holistic, continuous care for the elderly