By George Lagarias, Chief Economist at Mazars
‘Say goodbye to her, the Alexandria that is leaving. Above all, don’t fool yourself, don’t say it was a dream, [that] your ears deceived you’
C.P. Cavafy, 1911, ‘The God Abandons Anthony’.
Outlooks. The time-honoured financial industry tradition of toiling to write 30-40 pages of annual forecasts promptly binned by April- at the very latest. Yet, the industry gods demand it and deliver we must. To be fair, no asset manager has ever been held accountable for documents with a 30-day half-life. Yet, this year especially, the case is exactly that: precise predictions should be taken with buckets of salt.
We are most vulnerable to mistakes at a time when, even if we recognise that the world has profoundly changed, we try to analyse it with the eyes of the past, simply because these are the only tools available to us.
Instead of trying to forecast with the past’s eyes, we need to acknowledge how the present has changed, and develop the right tools to analyse the future properly.
It starts with recognising the impact of Covid-19 and the lockdowns. The pandemic broke supply chains, exacerbated simmering geopolitical tensions and aggravated relationships between buyers and suppliers, even between allies. It sowed mistrust between trade partners, forcing all to draw new fault lines, not just in terms of trading opportunities, but in terms of ‘friends’ and enemies. It shattered job norms, and removed whole cohorts from employment, leaving the ageing developed world jobs market in extremely tight conditions. The pandemic caused inflation, forcing central banks to depart from a 14-year ultra-accommodative paradigm, a word that maybe doesn’t justly describe a decade and a half of capitalism in assisted living. Meanwhile, the Great Moderation, a 40-year period of reduced macroeconomic volatility, can be officially pronounced dead.
The world has been changed profoundly and unequivocally.
In this world, British dreams of an easy transition away from the European Union, proved fantasies, as the global economic storm began to rage, drowning (or at least severely hampering) whatever post-Brexit plans its architects may have had. The UK economy is the only major one yet falling behind its pre-pandemic size and inflation is projected to drag on.
China, destined to become the 21st-century economic leader not that long ago, is now facing a crumbling housing market, mountains of internal (and somewhat hidden) debt, dissent and a dismal demographic picture.
Meanwhile, US economic leadership of the West seems as aged as its leadership. ‘America First’ proved a promise too difficult to turn around. The Fed is too focused at home, failing to acknowledge the impact of tighter rates abroad. The US government is faced with suspicion by its NATO allies, doing little to ease the tensions in Ukraine while at the same time welcoming the sale of Liquid Natural Gas to its European allies at exorbitant prices. The almighty Dollar is losing ground, as central banks load up on gold and investors are looking to build diverse reserves, for fear of America might become a less benign empire.
Europe is increasingly pressured by the realities of an unfinished currency union, its addiction to Russian energy, a key wealthy member departing essentially in protest (notwithstanding the cost to them) and lack of true centralised leadership.
As for businesses? On the one hand, they are trying to navigate their needs for higher capital expenditure, especially as the equipment is ageing, and for the re-designing of their supply chains. They know they need to grow sustainably, only they are not certain what this means. And they need to deliver higher returns to suspicious investors, in an era when the ‘Fed Put’ is hibernating. On the other hand, they need to make sure all important hands remain on deck, as inflation is driving up their biggest costs, wages, upping key person risks to the highest in decades. When business leaders look to central governments for guidance, they get precious little back.
A globalised world was barely manageable. A post-pandemic globalised economy has fallen in disarray. There’s little room for central planning and a new Bretton Woods, as allies view each other with suspicion. It thus stands to reason that whatever world emerges will be the bottom-up result of individual, uncoordinated business and political decisions. Order born as a necessity out of chaos.
This renders the present status quo, enhanced by fourteen years of monetary accommodation which only helped incumbents, out of date. There will be new winners and losers. Technology will play a determining role.
The seismic shifts upended a world where the centre already didn’t hold. They are the reason why old remedies may not work, as policymakers could well find out soon enough. Wave goodbye to the old world, with all its ills and joys, and let us on to discover what rough beast, its hour come round at last, slouches towards Bethlehem to be born?’*
But the post is in danger of becoming too long, even by this writer’s standards. That is the world we have. Precise forecasts are difficult indeed. In the second half, due next week, we will at the very least attempt to consider the shifting principles which should set the stage for another exciting and unpredictable year.