According to the World Bank, the pandemic and the war in Ukraine have had a considerable effect on (potential) economic growth. And this is said for several reasons. It seems that almost all of the economic factors that have fueled progress and prosperity in the last three decades are dissipating. Consequently, forecasts for the next decade are beginning to recognize these changes imposed by the new reality. According to a recently published World Bank report, it is estimated that between 2022 and 2030, the average potential growth of the world’s gross domestic product (GDP) will fall by approximately one third compared to the rate of the first decade of this century and will be located around 2.2% per year. “A lost decade”?
Technology and globalization managed to lower prices with an increase in production. “Cheap” capital found the places with the cheapest labor to invade the world with cheaper products. Production was centralized in a few places. And distribution chains became more complex. The system worked very well for a long time. But the systemic risk was increased significantly.
The pandemic and the war in Ukraine exposed the vulnerabilities of the system that has been brewing over the past decades. Now countries, to reduce systemic risk, want to return to production closer to home. I mean a return to economic nationalism. Which will obviously increase prices due to the increase in production costs.
We must recognize several things. First of all, the population is aging. And that has two consequences. On the one hand, the labor market will be affected by a reduction in their numbers. Additionally, the anti-immigration policies that have permeated lately in the most developed countries add more pressure to the labor market.
On the other hand, investors become more conservative with age. This means that capitals, when it comes to investing, will surely be more inclined towards fixed-income instruments than towards riskier assets. This obviously has an effect on income, investment and wages.
If the last three decades were characterized by deflationary pressures, the next decade could be characterized by inflationary pressures. These pressures are closely related to supply problems. Demographic, geopolitical, environmental, logistical, and labor challenges are at the top of the list of concerns.
The energy problem is particularly worrying and we can use it here as an example of the current situation. It is no secret to anyone that we have a production problem. That is, the capacity to increase world production is quite limited due to infrastructure limitations. For a long time, not enough has been invested. And now we are paying the consequences. We must remember that the oil companies are the bad guys in the movie. And, at the moment, it is not easy to find financing for the construction of new refineries.
This deglobalization process is essentially inflationary. C.With a much more limited productive capacity, we cannot expect the same level of production as before. During the last decade, the priority has been to find the most economical. If the most “economic” was a Chinese factory, that Chinese factory was the solution. Now, suddenly, the most “economic” goes to the background. Due to the pandemic and the war in Ukraine, there are other factors that must be taken into account. Is it convenient to depend so much on Chinese production? Is it convenient to depend so much on Russian oil? Is it convenient to be so dependent on Ukrainian wheat?
Indebtedness, inflation, population ageing, rising cost of credit, scarcity of capital for investment, geopolitical tensions, logistical challenges, falling inventories, populism, radicalism, sanctions, war conflicts, the imposition of tariffs, anti-immigration policies, and infrastructure failures, among other variables, cThey place a ceiling on our (potential) growth due to a matter of capacity.
And the banking crisis? And a recession? Of course it is always possible to go from bad to worse. Of course a larger banking crisis would reduce productivity even further. And of course, an out-of-control recession would further intensify our growth problem. Many more things can go wrong. And normally, when many things can go wrong, many things do go wrong.
However, there is always room for hope. In this sense, at the top of the list is technology. Technology is, in essence, deflationary. After all, technology makes us more productive. Advances in the field of alternative energy, for example, have the potential to solve the energy problem. Artificial intelligence, robotics, and automation can lower costs in many areas. And so. Technology is one of the factors that can come to save the day in this new stage.
However, technology is not something that advances by itself. Investment is required. And, with a technology sector so battered, you couldn’t say that money is falling from the sky. So much startups as big tech companies are going through a rough patch right now. Due to the fall in income, there are cuts of all kinds. In other words, now there is less money for research, innovation and development, because now most of the companies in the sector are in survival mode.
“A lost decade” is a period characterized by prolonged economic stagnation. The World Bank warns us of this possibility of a lost decade for the period 2022-2030. In other words, the average annual growth could be half or less than the average of the last decades.
What does a “lost decade” mean for markets? In general, an eternal lateral movement. In the short term, prices rise. Prices go down. But always respecting the lateral trend in the long term. The first reaction is denial. Because we are already used to sustained growth with relatively short bearish cycles. That is, it is not easy to get used to it.
Will we have a “lost decade”? We do not know. However, the possibility is real because the conditions are given. It is not a certainty. But there are worrying signs.
Disclaimer: The information and/or opinions expressed in this article do not necessarily represent the views or editorial line of Cointelegraph. The information presented here should not be taken as financial advice or investment recommendation. All investment and commercial movement involve risks and it is the responsibility of each person to do their due research before making an investment decision.
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