1. Expected scenario
- Government policy will continue to have a greater impact on the economy. During the banking and coronavirus crises this was on a more occasional basis, geared to solving and combating acute problems. The escalation in measures to achieve climate goals, realise the energy transition and increase spending on defence is structural in nature;
- In geopolitical terms, we will increasingly move towards a multipolar world. This will change the nature of the globalisation of the last few decades. Political risk will play a more prominent role in deciding on production locations. There will be a drive to diversify international supply chains, with less focus on just-in-time efficiency and more on just in case: shock-proof supply chains in case of a crisis. The rate of reshoring, or bringing supply chains closer to home, will remain low for the time being though;
- The economic impact of these trends will be higher inflation that is further exacerbated by the commodity-intensive energy transition. There will be little effect on real growth. Central banks will raise interest rates but these will remain below the nominal rate of growth. For the financial markets this translates into a de facto continuation of financial repression.
2. Widespread regionalisation
- Joe Biden’s election as US president looked as if it would trigger a return to multilateralism and international cooperation. Russia’s invasion of the Ukraine and China flexing its muscles towards Taiwan shattered that optimism and led to a variety of responses from the world’s power blocs;
- In this scenario the shift towards a multipolar world will be rapid and all-encompassing. From reshoring supply chains and trade wars to political nationalism. Trade between the US and China will slow substantially. Populist policies will lead to higher budget deficits, higher taxation on businesses and less independent central banks. Geostrategic, ideological power blocs will become diametrically opposed to one another;
- The closed nature of economies will lead to lower growth. Different technological standards will evolve alongside each other, there will be less global competition and innovation and productivity will be squeezed further. Higher taxation will discourage investment. This will push up inflation slightly;
- This will be a tough environment for equities. Demand for bonds will mostly focus on high-quality bonds, whether issued by governments or businesses.
3. Faster climate change
- Climate change will cause natural disasters to occur faster, more frequently and on a larger scale than expected, resulting in an enormous amount of damage worldwide. This will constitute a tipping point in the political momentum for restricting further climate change; the global community will recognise that things cannot go on like this;
- Governments will respond by reducing the use of fossil fuels and investing in a more climate-proof infrastructure. Prices for emission rights will soar, increasingly forcing policymakers to choose between stable energy supplies and environmental norms. Cross-border levies, on a larger scale, will attempt to compensate for the cost disadvantages to a country’s own industry. Governments will prioritise their own populations when it comes to food and energy supplies;
- The structural impact of climate change and the damage caused by destructive natural disasters will be unequally distributed across the world. The patterns of economic cycles will become less predictable and more volatile. Together with investors demanding higher rewards, this will weigh heavily on the returns on equities and riskier credits. Inflation and interest rates will be higher than in the expected scenario.
- In this scenario it is assumed that technological developments will give productivity a structural boost. The disadvantages of the reduced globalisation will be offset by technology, so that the rate of inflation remains under control and growth is stimulated by higher productivity. Technological developments will also facilitate the energy transition and climate adaptation;
- Not everyone will have the skills to keep up with the technological developments. Yet the economy will be in good enough shape to cloak this with growth. This will curb social dissatisfaction and its potentially harmful consequences;
- Central banks will be able to normalise their policies without needing to be restrictive;
- For financial markets this will be a goldilocks scenario (neither too hot nor too cold). Equities and (riskier) credits will profit from this. Interest rates will be higher than in the expected scenario as a result of the higher growth.
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