The following five themes (and three bonus ones) are what UBS Andrew Cates believes will be of the greatest importance for global economic and capital markets outcomes for the next five years. There is little to surprise here but the aggregation of these factors and the increasingly binary outcomes of each of them suggest there may be a little more uncertainty about the future than most people sheepishly admit...
We highlight five themes we expect will be dominant for global economic and capital market outcomes over the next five years. For the curious, we also mention a few themes that didn’t quite make the cut, but are nevertheless worthy of consideration.
#1 Right-sizing monetary policy
Cleary, a major challenge facing central banks at some point in the next five years will be restoring ‘normality’ to monetary policy. The first task, in all probability, will be right-sizing bloated central bank balance sheets (followed by a normalisation of policy rates). The challenges for the central bankers—and market participants—are both unprecedented and enormous. How will central banks manage that process? Can they manage it? What will be the implications for real economic activity, capital flows and asset prices? Those are all topics we’ll explore in this theme.
#2 Right-sizing fiscal policy
As if monetary policy weren’t enough, fiscal policy in many economies—advanced and emerging—requires right-sizing as well. For some, the focus is on deficit reduction. For others, it is debt stabilisation. And for still others, it is meeting demographic challenges to government spending and tax revenues. For some, it is all of the above.
#3 Age of plutocracy
In many advanced economies returns on capital—physical and human—have soared. Income and consumption distribution have become more skewed. Yet, populist backlashes against unequal outcomes are relative tepid. Indeed, business seems to be getting its way politically—witness the reality of more corporate tax cuts than hikes in recent years or the new-found will to press ahead with globalisation via free-trade deals spanning (much of) the Pacific and the Atlantic. How long can an era of plutocracy last? What challenges lie ahead?
#4 A world not re-balanced
Although current account imbalances have shrunk since the outbreak of the financial crisis, much of the decline is due to recession and subpar recovery. Sources of domestic demand are few and largely concentrated in the US. Emerging economies, once the poster children for domestic-led growth and re-balancing, are now facing debt hangovers. Emerging economies, along with Europe and Japan, are returning to a greater reliance on net exports as their chief drivers of growth. The consequence is a return to a world of imbalanced growth. What are the implications for the world economy and asset pricing?
#5 Technological innovation
New technologies applied to energy extraction, information systems and manufacturing hold great promise for lifting potential growth around the world. How big might the impact be on real output? Who are the likely winners and losers of the next technological revolution? What are the implications forinvestment returns?
Finally, we felt it important to consider key themes that didn’t quite make the cut into our top-five. That doesn’t mean they won’t occasionally capture the attention of investors and policy makers. But in our opinion they aren’t likely to be as durably important as the five we’ve listed above. Here are some of those candidates:
Just because Eurozone sovereign risk premiums have declined does not mean all is permanently solved. The European monetary union remains incomplete and hence fundamentally flawed. Moreover, the prospects for a more robust re-design of the Eurozone—which would include a banking union with single resolution authority and mutualised deposit insurance, plus enhanced labour mobility or fiscal transfers—remain bleak. So, too, do the prospects for re-employing the millions left jobless in Europe’s periphery, chief among them young people. Against that backdrop, ‘exit’ or ‘breakup’, but also political stress, will form a spectre hanging over the single currency project for considerably longer.
Japan rising? Or Japan setting?
‘Abenomics’ is not hype. It’s decisive. If Japan can restore inflation, achieve a reasonable rate of GDP growth, raise potential output, and rein in its explosive debt dynamics, it and the world economy will be vastly better off. Investors would have much to cheer. But if ‘Abenomics’ fails, Japan will probably return to its deflationary malaise of recent years and could be potentially on an irreversible course to default via hyper-inflation. A great deal is at stake. How will it turn out?
Emerging reforming? Or emerging deforming?
As we have noted in a series of reports over the past two years, productivity growth is slowing rapidly in emerging economies. Equally, relative returns on capital are slumping. And debt trajectories are unsustainable in many emerging economies, including China. A common prescription is required to get emerging back on track: Reform. To be sure, the required reforms differ considerably from country to country, but the overarching question is whether emerging politics and policy can deliver. We’re sceptical, not because the challenges aren’t recognized (witness the reform language of China’s 3rd Plenary session or of Mexico’s reformminded president). Rather, reformers are up against vested interests, such as the banks and state-owned enterprises in China, nationalism in Mexico, or business, labour and legal opposition in India. Absent a crisis, reform is politically very difficult and, for now, most of the emerging complex is not sufficiently in crisis mode to embark on reform.
[ZH: So apart from all that... why not BTFATH?!!]