Bob Swarup traces cycles of globalisation and deglobalisation in recent centuries and concludes that the world is now turning towards Deglobalisation 2.0
The world is a complex place, but our brain is only three pounds. This quarterly column assesses a selection of key macro risks relevant for pension funds at a high level. We also deep dive into a particular dynamic that merits further thought. These often cross multiple buckets reflecting the interconnected complexity of today. Importantly, this is not an isolated point-in-time exercise but a regular updating to aid assessment and inform action.
• Deglobalisation 2.0. The world is getting smaller. That is the unbidden meme of our generation, thanks to the juggernaut of growth unleashed by an outpouring of global bodies, free trade agreements, technology and international capital. Today’s paradigm is globalisation and free trade is its evangelical mantra.
But the narrative has become worn and no longer fits. Globalisation is dead. Today, we have a new meme in the making – deglobalisation – as people turn their backs on an interconnected world economy.
Globalisation may be defined as the economic state where trade across nations is growing faster than GDP. People interact more, transact more and create more wealth. Deglobalisation is the alternate state where trade grows less than GDP. Countries focus inwards, trade declines as a proportion of GDP and growth shrinks. A clear cycle of the two emerges if we examine GDP growth versus trade growth.
• Proto-globalisation (1820-1870). Rapid global trade growth, thanks to the Industrial Revolution and the spread of European colonial rule.
• Globalisation 1.0 (1870-1913). Empire-building became the norm. Trade was aided further by rapid advancements in transport and communications. But rapid change also led to volatile bouts of economic obsolescence and financial crisis.
• Deglobalisation 1.0 (1913-1950). Limited growth, unequal outcomes and a huge debt overhang stoked widespread nationalism and protectionism. Trade fell and a collective failure to tackle deeper structural issues led to the 1930s.
• Globalisation 2.0 (1950-2010). Since then, we have been on a tearaway expansion with unparalleled growth of both global trade and GDP.
• Deglobalisation 2.0 (2010- ?). The last financial crisis crystallised the growing sense of social disenfranchisement. A toxic mix of suppressed wages, divisive politics, and rocketing debt has destroyed the allure of globalisation for many.
This is more than a sense of ennui. Globally politicians are responding to shifting public moods. The ascendancy of Trump and Sanders in the US has shifted the political debate towards isolationism. In Europe, Brexit is the latest step in a hauntingly familiar nationalist narrative. Meanwhile, China and Brazil are struggling with the after-effects of too much debt-fuelled growth.
Global trade is not slowing down but actually declining. Since its peak in January 2015, it fell -3.4% by May 2016. Analysis lays the blame not with commodity price falls, but shifts in trade policy. Protectionist measures in 2015 were up 50% on 2014, with over 80% coming from G20 members. The deleveraging of banking balance sheets has also hit cross-border lending, as banks retreat from peripheral to core domestic activities.
Bob Swarup is principal at Camdor Global Advisors, a strategic investment and risk advisory firm. He can be contacted on email@example.com
Key macro risks
Geopolitical and socio-political
Impact: Medium to high
Post Brexit, Britain has regained some political equilibrium after being run by Twitter and 24 hour news channels. There is a sense of complacency creeping in about muddling through, but economic data will worsen over coming months and socio-political fractures still lurk just beneath the surface. The focus now shifts to Europe where the first compromises are emerging now that the exit genie is out of the bottle. Italian banks were first. Spanish austerity is next. Religious tensions are also reshaping the landscape for the first time in centuries. In the US, beneath the schadenfreude and soaring sales of Trump pinatas, a clear shift towards isolationism is emerging. Both parties face a growing internal battle for their souls (and direction). The Permanent Court of Arbitration also ruled against China in the long-running South China Sea dispute, exacerbating regional tensions.
Impact: Medium to high
Brexit exemplified the sense of disenfranchisement prevalent across advanced economies today. That will worsen near-term. The UK has seen a significant decline in business investment as companies wait for clarity, creating a high probability of a technical recession. Brexit also accelerates the process of rebalancing already underway as financial institutions shrink balance sheets and the property market absorbs higher (taxation) costs of ownership. Though ultimately beneficial, that creates shorter-term disruptions, even if QE may salve the path. Europe also faces pain as banking balance sheets come under strain, and upcoming 2017 elections in France and Germany create a lack of tangible political commitment to economic reform. Globally, the decline in trade growth will weaken demand further for commodities. And in the US, productivity growth has entered its longest downward patch in almost 40 years.
Impact: Medium to low
Markets have stabilised, as central bankers reiterate dovishness. The BoE has restarted QE and the Bank of Japan will expand its buying list further as it runs out of JGBs. Notwithstanding moral hazard, these will sustain financial markets. The further suppression of yields also only makes risky assets more attractive. But divergences are appearing. The US is finding it harder to justify a dovish stance given recent data and political overtones. The pricing mechanism in financial markets is now dead. These are all sentiment trades bringing added unpredictability to the table. On the ALM front, liabilities have grown even further, creating more pain and a greater hunger for yield. The return of QE also threatens to further leach quality collateral from the system. Given the proliferation of LDI coupled with changing regulation (such as EMIR), liquidity here can only worsen.
Impact: Medium to high
Migration is becoming the dominant narrative in European politics. Its confluence with worries about global security and the rise of terrorism means that the politics of division is once again acceptable and palatable. Upcoming elections in France and Germany will test how deep this runs within their societies. We expect strong gains for populism and nationalism, which will tinge the political debate, much as has already happened in the US. Both are historically negative for growth and trade, accentuating the new paradigm of Deglobalisation 2.0 today. As noted before, we expect the world to become very familiar with the term ‘climate refugee’. Africa is facing severe challenges both climate wise and economically, and we expect a growing wave of migration from there into Europe. The debate will also tinge future Brexit negotiations and should not be ignored.
SWFs confound the sceptics
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Macro Matters: Globalisation is dead