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The post pandemic great global reset
2020 was the year that no one expected. The pandemic put immense pressure on our healthcare systems, societies and economies, whilst exacerbating growing world inequalities. As the promise of widespread vaccination offers light at the end of the tunnel, we must consider key questions for our short and medium-term future: how sustainable are current debt levels? What shape will the recovery take? How concerned should we be about rising inflation? And what role will sustainability play in building back better?
Martin Wolf, CBE, Chief Economics Commentator and Associate Editor at the Financial Times offered his perspective on the themes shaping our economies and societies in the years ahead, the macroeconomic context, and some of the tail risks involved.
History in the making
Evidently, 2020 was a historical moment. Yet, according to Wolf, before we were hit “by the pandemic bus”, the global economy was already struggling to recover from the 2007-2009 crisis. Pre-2007, many economists assumed we would continue to have strong economic output growth, yet the UK‘s output was “20% smaller in 2019 than the pre-crisis 2007 projections”. Large reductions in GDP relative to pre-crisis trends also occurred in other big developed nations, with the noteworthy exception of Germany. Reduced economic activity had an impact on living standards, as well as broader fiscal implications.
Increased political fragility in democracies is another key theme, says Wolf. We have witnessed increased inequalities, disillusioned populations and the disenfranchised finding a common voice in populism. Arguably, Trump’s surprise 2016 win or the Brexit vote of the same year, where millions of Britons elected to leave the European Union, are key examples. These sentiments “remain present in the West and can be seen as a part of a wider worldwide movement towards autocracy,” states Wolf, notably in India or the Philippines.
The trade question
One cannot deny the global economic shift towards East Asia and China, nor the tensions between the US and China. We have yet to learn the new US administration’s stance on China but we can envisage a future where there will no longer be a global system of multilateral co-operation. Wolf expanded on the emergence of China as a new superpower and reminds us “it was only in 2002 that the Chinese economy was same size as UK economy”. Today, it is the world’s biggest trading power.
Technology has underpinned this, and its exceptional speed continues to influence global trade. The FT’s Chief Economics Commentator declares there has been “a profound change in the nature of globalisation…”between 1980 and 2007 we saw the trade ratio to global GDP reach an historic peak.” Shortly after, due to the financial crisis, manufacturing output slowed and since then we have been in a stagnating phase of globalisation and also of global demand. This “secular stagnation mode”, which began in 2007, is characterised by “chronic deficiency in demand, low interest rates, aggressive monetary policy and a rapid increase in private and public sector debt.”
An unprecedented response
Needless to say, the fiscal and monetary response to Covid-19 has been unparalleled. Wolf notes that if you compare this pandemic to the Spanish flu outbreak, in terms of deaths (thus far) the Spanish influenza had a far higher count, yet with Covid-19 “we closed down our economies because we could afford to do so.” Wolf highlights that “this is a profound indication of wealth and how society has changed.” 2020 saw aggressive monetary and fiscal responses and these measures will not just be turned off. We can expect these interventions, and low interest rates, to continue in the near future.
One of the key trends to come out of the pandemic is the acceleration of technology and communication. The way in which we “organise production and office life” will not be the same in future. Wolf describes how we have in fact “advanced a decade, technologically, in a year.” This advancement paves the way to virtual globalisation, which will be a consistent post-crisis trend.
The rocky road ahead?
There are some big questions to confront, namely, where do we go from here? Wolf is “moderately optimistic” and feels the pandemic is coming under control due to vaccine roll-outs and rising herd immunity. Despite the many challenges vaccine manufacturers have encountered, he believes “they will continue to adjust their formulas to achieve success”. Wolf expects countries to see “strong recoveries”. It is also worth noting that the balance sheets of wealthier households are doing well, given markets are strong, liquidity levels are up and discretionary spending has fallen.
Interest rates and inflation should ultimately normalise as we start to recover, states Wolf. This does beg the question “will this force a re-evaluation of markets?” Wolf goes on to say that “the discount factors for markets will rise but we should have a good recovery and good profits.” But, in the longer term, we may be facing a paradigm shift: an ageing population, higher fiscal spending and lower savings rates may end the demand deficiency aspects of secular stagnation.
Building back better
Our economy is staggeringly inefficient and now we have a chance to rebuild our economies and societies. A chance to build back better, especially in meeting the climate challenge. Wolf believes that we can try to “improve the value of our consumption without consuming more.” How? By shifting to renewables, reducing pressure on land, decreasing our meat consumption, harnessing natural capital and investing in companies that can provide solutions. A big ask – but an action that is both necessary, and urgent.
Important information
This document is issued by Bank Lombard Odier & Co Ltd or an entity of the Group (hereinafter “Lombard Odier”). It is not intended for distribution, publication, or use in any jurisdiction where such distribution, publication, or use would be unlawful, nor is it aimed at any person or entity to whom it would be unlawful to address such a document. This document was not prepared by the Financial Research Department of Lombard Odier.
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