Navigating the future: Four key trends shaping the global economy

Deglobalisation is already impacting trade and investment. Global trade has been growing slower than GDP for some time (Figure 1). In our view, this deceleration is likely to persist if tariffs continue to rise, non-tariff barriers become more prevalent, and concerns about technology and security intensify. The era of the rapid fragmentation of production globally to its lowest cost location appears to be over.

Figure 1: Global trade and global GDP

Source: Macrobond

At the individual company level, this shift implies fewer opportunities to cut costs through outsourcing and increased barriers to global markets. However, the most significant implications are macroeconomic, including:

• Inflationary pressures: As goods inflation returns, underlying inflationary pressure will increase globally;
• Interest rates: Higher interest rates are needed to keep inflation at or around central bank targets;
• Productivity growth: Reduced competition could negatively impact productivity growth; and
• Industrial policy: Greater government intervention in economies and markets through industrial policies.

Digitalisation is another powerful structural trend that we believe is set to transform societies and economies. The current surge in data usage is primarily driven by what seems to be an insatiable demand for video from consumers (Figure 2).

However, as technologies like robotics, driverless cars, the Internet of Things (IoT) and artificial intelligence (AI) become mainstream, we could see a veritable explosion in data consumption. Each of these technologies consume vast amounts of data – for example, a driverless car consumes about 4,000 gigabytes (GBs) of data per day; a 2-hour movie, for comparison, is about 6GBs.

Figure 2: Data consumption and video

Source: Ericsson

The infrastructure needed to support this massive data influx presents significant investment opportunities. Understanding the broader impact that the growing use of data will have on consumer behaviour, corporate cost bases and their ability to deliver goods and services, and productivity at the aggregate economy level will be critical. By 2035, the world could be vastly different; and we believe digitalisation will be a major catalyst for these changes.

Decarbonisation is another trend that will continue to disrupt multiple sectors of the global economy, from power generation to transport and industry. This trend represents opportunity and threat: significant capital investment will be required to facilitate the transition (the opportunity); while many assets currently in existence will have their useful life shortened, or the demand for their product curtailed (the threat). Understanding both sides of this trend is essential for successful investing.

The size of the capital opportunity is indeed gargantuan in scale. Estimates for the required investment in wind and solar energy, energy storage, and grid reinforcement to decarbonise the global power sector reach approximately US$44.8 trillion, as indicted in figure 3. Add in an extra ~US$8 trillion for investment in existing technologies – such as hydro and nuclear – that forecasters believe will be necessary, and the total investment needed by 2050 rises to US$53.4 trillion. And this figure only covers power generation – additional capital will be necessary for transport, industry and building decarbonisation.

Figure 3: Capital requirements by 2050 for the electricity generation sector

Source: International Energy Agency (IEA), Bloomberg New Energy Finance (BNEF), International Renewable Energy Agency (IRENA)

The world is ageing rapidly, particularly in developed regions such as Japan and Western Europe (Figure 4). This trend has powerful implications for health care spending, growth in working age populations and therefore GDP, and government finances. However, there are many developments within these aggregate demographic trends that are worth paying attention to. For instance, in some countries, growth in the 35-44 year age group is expected to accelerate (Figure 5), which could drive increased demand for housing as families expand or children reach their teenage years. This has clear implications for the real estate sector and demand for detached and semi-detached housing. While the overall ageing populations trend is well known, understanding these nuances can help investors identify and capitalise on new demand trends in various sectors, such as real estate.

Figure 4: Share of population 65+

Figure 5: Different cohorts growing at different speeds

Source: United Nations, Oxford Economics

To summarise, the 'four Ds' are set to reshape the global macroeconomic and investment landscape significantly. Investors who can deeply understand these trends, accurately measure their development, and appreciate their wide-ranging implications will be well-positioned to navigate the evolving economic environment. It is undoubtedly a world in transition.