The trends that will lead us

Unfortunately, the Greater Recession led to a L-shaped recovery which may lead to a “Greater Depression” later in this decade owing to seven risky trends.

The first trend concerns deficits and their corollary risks: debts and defaults.

The policy response to the Covid-19 crisis entails a massive increase in fiscal deficits at a time when public debt levels in many countries were already high, if not unsustainable.
Worse, the loss of income for many house-holds and firms means that private-sector debt levels will become unsustainable too, potentially leading to mass defaults and bankruptcies.

Together with soaring levels of public debt, this all but ensures a more anemic recovery than the one that followed the Great Recession a decade ago.

A second factor is the demographic time bomb in advanced economies. The Covid-19 crisis shows that much more public spending must be allocated to health systems, and that universal healthcare and other relevant public goods are necessities, not luxuries. Yet, because most developed countries have ageing societies, funding such outlays in the future will make the implicit debts from to-day’s unfunded healthcare and social-security systems even larger.

A third issue is the growing risk of deflation. In addition to causing a deep recession, the crisis is also creating a massive slack in goods (unused machines and capacity) and labour markets (mass unemployment), as well as driving a price collapse in commodities such as oil and industrial metals. That makes debt deflation likely, increasing the risk of insolvency.

A fourth (related) factor will be currency debasement. As central banks try to fight deflation and head off the risk of surging interest rates (following from the massive debt build-up), monetary policies will become even more unconventional and far-reaching. In the short run, governments will need to run monetised fiscal deficits to avoid permanent negative supply shocks from accelerated de-globalisation and renewed protectionism will make stagflation all but inevitable.

A fifth issue is the broader digital disruption of the economy. With millions of people losing their jobs or working and earning less, the income and wealth gaps of the 21st century economy will widen further. To guard against future supply-chain shocks, companies in advanced economies will re-shore production from low-cost regions to higher-cost domestic markets. But rather than helping workers at home, this trend will accelerate the pace of automation, putting downward pressure on wages and further fanning the flames of populism, nationalism and xenoohobia.

This points to the sixth major factor: deglobalisation. The pandemic is accelerating trends toward balkanisation and fragmentation that were already well underway.

A final risk that cannot be ignored is environmental disruption, which, as the Coy-id-19 crisis has shown, can wreak far more economic havoc than a financial crisis.

By Terry Grennon

Asset Allocation Strategist