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The US-China tension is one very visible illustration of this reality, but this trend towards deglobalisation has been in place since the start of the financial crisis. For instance, it’s notable that global trade (as a share of global GDP) has been flatlining for 10 years now, after rising on a continual basis for over 30 years.
There will still be economic cycles, but this structural theme of deglobalisation is changing the nature of those cycles and the underlying trends they oscillate around. This is a clear frame break from the past and will be played out over multiple years. While we will likely see an ebb and flow, driven by the broader dynamics of the economic cycle, the path is clear and concerning for economic growth.
So where do things go from here? In this post, we share seven macro directions related to the theme of deglobalisation. The long-term investment implications of these trend breaks are clear, but over a cycle, how markets respond will depend on how policymakers respond. We believe these responses will likely vary across countries and be much less synchronised than in the past.
The euro area shares many fundamental characteristics with the Japan of the 1990s: lower trend growth since the 2008 recession, a large and persistent current account surplus, low inflation, weak banks, corporates with a large and persistent financial surplus and an anemic demographic outlook. Although this theme isn’t new, markets are currently expressing this “Japanification” malaise in the euro area with depressed bank stocks, record low inflation expectations, tight spreads and low volatility.
We believe that uncertainty about the ability and willingness of European policymakers to deploy the necessary measures requires higher risk premia compared to Japan. The market continues to play the Japanification theme but it feels to us that the outcomes will be very different. While the adjustment trajectory of Japan has been long, stable and orderly, we believe there are three reasons why the euro area is unlikely to follow a similar path:
1. No safety net from global growth
Japan’s adjustment in the 1990s took place against the backdrop of strong global growth. In the five years after the Japanese recession in the early 1990s, global trade volumes increased significantly. Globalisation accelerated, allowing Japan to make a more orderly and smooth transition. We believe the euro area is unlikely to enjoy this tailwind as globalisation trends reverse and global trade flatlines…