Monthly Market Update: A pandemic that changed the world

Mon 19 Dec 2022

Even if we recognise that the world has profoundly changed, we try to analyse it with the eyes of the past. 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. It shattered job norms and removed whole cohorts from employment, leaving the ageing developed world jobs market in extremely tight conditions. The pandemic also caused inflation, forcing central banks to depart from a 14-year ultra-accommodative paradigm. 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 economy remaining below its pre-pandemic size and inflation in the UK is projected to drag on. China is now facing a crumbling housing market, mountains of internal 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, completely failing to acknowledge it 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, and lack of true centralised leadership.

As for businesses? On the one hand, they are trying to navigate their needs for higher capital expenditure, and 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 wages, significantly increasing key person risks.

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 out of chaos. This renders the present status quo 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.

George Lagarias – Chief Economist