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The Future of the Economy:
How to Win in a Low Growth Environment

A low-growth post-COVID global economy will present significant challenges

Rapidly rising debt levels, innovation, shifting balances of power, and the decline of international cooperation are collectively changing the structure of the existing world order.

As part of RBC Investor & Treasury Services' Big Ideas Webinar Series, Dr. Dambisa Moyo, a leading economist, best-selling author, and board director at Chevron and 3M Company, shared her unique insights into some of the main drivers shaping the global economy moving forward.1

While COVID-19 has
undeniably had a
significant impact on
the global economy,
in many ways it has
simply accelerated
shifts already well
underway.

1. COVID-19 has accelerated pre-existing economic trends. The pre-COVID period feels like such a long time ago that it is easy to forget that economic growth was low in 2019 and experts forecasted it would remain that way for the foreseeable future. Debt levels were rising exponentially and there were mounting concerns that certain monetary policies–principally the introduction of negative interest rates–were no longer sustainable. At the same time, inequalities around income, health, and education were rapidly rising. While COVID-19 has undeniably had a significant impact on the global economy, in many ways it has simply accelerated shifts already well underway.

2. There is a difference between a rebound and a recovery. There is likely to be a rebound in 2021 as normality gradually returns; however, a number of headwinds–including the high sovereign debt mountains–will be a drag on the longer-term economic recovery. Growth will likely be badly constrained in the years to come as governments struggle to pay back this debt during a period of continued low growth.

3. The period that followed the US Gilded Age provides a roadmap for the post-COVID period. The Gilded Age was an era of US economic growth and prosperity between 1870 and 1900 that was heavily dependent on globalization, free trade, unimpeded movement of people, light-touch government, and large corporations. It was ultimately punctured by World War One, the Spanish flu, and the 1929 Wall Street crash. The period that followed between 1930 and 1954 was marred by low economic growth, high unemployment, de-globalization, and increased trade tariffs.

4. De-globalization is rising. Government-imposed tariffs and quotas on global goods are reducing cross-border movement of goods and services and breaking down supply chains, leading to more global trade disruption. In fact, the World Trade Organization has estimated that global trade growth has receded to around 3% per year. In addition, several countries have seen a growing anti-immigration sentiment. Without greater economic success, we likely will see continued popular support for policy decisions like those present in the Trump agenda and Brexit.

5. The continued breakdown of international cooperation. There is growing debate about the so-called Splinternet emerging, namely a Balkanization of the Internet being fueled by competing technology platforms operating out of the US and China. This split could prove to be very disruptive for global businesses. Similarly, COVID-19 has resulted in nations taking a self-interested approach towards dealing with the crisis, and eschewing global cooperation. It has also highlighted structural weaknesses at supranational bodies such as the World Health Organisation.

6. Anti-trust could re-emerge. As the world recovers from COVID-19, governments are likely to take a tougher line on anti-trust by targeting oligopolies in sectors such as aviation, banking, energy, and technology.

7. China is going from strength to strength. China has ambitious plans to expand its economy and is bankrolling a number of high-profile infrastructure projects across the world as part of its Belt and Road Initiative. The country is also now the largest lender to emerging markets and one of the biggest investors in both developing and developed markets. In summary, China political leaders’ approach today is comparable to the economic stance that the US government held in the 1950s. Despite the country's growing influence and return potential, Western fund managers remain heavily underweight in China, even though it is opening up its public markets.

The market has not
yet factored in the
revolutionary potential
that technology could
have in sectors such
as healthcare and
education.

8. Healthcare and education offer untapped upside potential. During the pandemic, the pharmaceutical and life sciences industries have demonstrated an ability to deliver information and vaccines at an unprecedented pace, generating a great deal of interest in the potential opportunities for big data. Consumer- and network-oriented technologies like Amazon and Facebook have received the lion's share of technology’s attention but the market has not yet factored in the revolutionary potential that technology could have in sectors such as healthcare and education.

9. ESG (environment, social, governance) is not a binary premise. ESG is often viewed through a Western-centric lens, which does not take into account the needs of emerging markets. While solving climate change is essential, we cannot forget that there are 1.5 billion people who do not currently have access to sustainable and affordable energy. Compromises will need to be made as new opportunities emerge.

10. Inflation needs to be viewed more granularly. Inflation is beginning to come to the surface–most notably in areas such as logistics, materials, and labour–but it has not yet percolated to the point where central banks need to intervene. Nonetheless, a granular approach to inflation, rather than a broad-based one, is now required. Whereas there has been inflationary pressure in sectors such as healthcare and education, there is now deflation in food production and telecommunications owing to the increasing adoption of new technologies.

 

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Sources

  1. RBC Investor & Treasury Services (April 22, 2021) "Big Ideas Webinar Series: Dr. Dambisa Moyo"