Captivated by the recent years of unprecedented global GDP growth, we all hoped – in our typical naivety – that it would last forever. Reality eventually bit and we again realized that there is no way to evade the basic economic foundation of cyclicity. It is important to say this out loud: we have now entered a time of noticeable global economic slowdown. Fortunately, it does not bear the signs of a crisis, but it does require our higher concern and the adjustment of our business understanding, thinking, and planning.
On the one hand, we are witnessing a synchronized global slowdown, driven by China and followed by all the key economies, i.e. the US and the Eurozone. The world economy has entered a low-growth phase, recording its weakest levels since the last financial crisis. GDP has slowed from 3.6% last year to 2.9% this year, before hitting a predicted 3% in 2020. Europe is experiencing a severe downturn affected by the transition of China, a country moving from an investment-led to a consumption-driven economy. On top of this high uncertainty, lasting political factors continue to weigh upon investments, singling out the UK as the most impacted. Inflation is falling, which – when coupled with low GDP growth – has led the ECB to reinstate the asset purchase programme and slightly decrease deposit rates, all in an effort to wake the real economy up. The current policy mix relies highly on monetary policy actions, with the fiscal side being left behind, especially in respect to public investments needing more drive by governments. Interestingly, with all the above being said, economic conditions across the G4 countries have not been better for a long time. For example, consumption per capita continues to rise (with the exception of the UK), wages are increasing, and unemployment remains at a record low (Poland included). Despite the macro tensions, overall economic and consumption conditions remain optimistic, so how could this translate into a slow-down? The global economy is stuck in low growth territory; hence – from a business perspective – it would be useful to name the key factors that are impacting the lowered growth environment:
– Demographics. Slower working age population growth and an aging society continue to be a huge challenge for the largest economies, China and Europe in particular, with Poland also being impacted. This will hugely affect labour markets, social obligations, societies, and business models.
- Chinese transformation. Today’s China is not as it was ten years ago. Investment levels are lower, with this impacting capacity, productivity, and output. Today’s growth is becoming more westernized and to a greater extent driven by consumption. As China remains the main contributor to world growth, any decline in local demand would impact us globally, with the German economic slowdown being a current example.
– Capital Markets. Although markets remain strong and liquid, the first fears of recession have appeared. Along with ultra-low interest rates came very low yields, which has only accelerated the hunt for returns. When hunting for yields, the tolerance for risk must increase, causing a paradox that could lead to aberrances. Could this be a ‘Minsky’ moment in the making? In a bullish market, the buy side risk management model starts to loosen up, with the sell side responding with products offering higher returns, evidenced now with the advent of structured products like CLOs, leveraged loans, and high-yield assets. Fortunately, despite the fact that interest rates remain very low, they are not exceeding the pace of economic expansion, keeping capital costs low, and in effect not causing any spike in defaults.
- Geopolitical tensions. Escalating trade limitations, currency and trade disputes, and Brexit are all acting to raise uncertainty levels and – to our surprise – gravitating highly to developed markets. Populist sentiment continues to erode international cooperation and exposes emerging market vulnerabilities. On top of this, cybersecurity is becoming a more important and impactful threat to both business and social activity, emerging as a key challenge for our tomorrow.
This leaves us with the need to raise one additional key theme for today, if not the most important and worrying one: climate change and the long term impact of the global growth model that for decades came at the expense of the environment. Disturbing reports of environmental degradation continue, with future forecasts being nothing but grim for the planet and us all. Despite increased environmental awareness and various campaigns led by global institutions, multinationals and societies, the need to preserve the environment still remains incompatible with our modern growth model. This requires a severe transformation with businesses needing to play a more active role in this systemic undertaking. We are faced with the need to implement something very different to what led us here, a model based on sustainable growth, one that not only addresses climate issues but factors in other global challenges, such as poverty, the state of healthcare, education, and transparency. That is why markets are highly focused on Environmental, Social and Governance policies & strategies, with these starting to compete equally with traditional ways of value generation through financial and business factors.
Although Poland is still in a phase of robust economic growth, let us accept that we cannot realistically avoid an economic slowdown. We all recognize how strongly the Polish economy is connected with Europe, on all possible levels. The current strong GDP growth gives us all a solid projection of about 4% year-on-year. Recently implemented fiscal measures further reinvigorate the consumption boom, with exports and manufacturing for now remaining resilient to pronounced weaknesses in Germany. The key risks to growth remain in the external environment: protracted weakness in the EU, the escalation of global trade tensions, and the risk to investment flows from other higher yield geographies. To complete this list, the environmental topic should resonate with us even more, with Poland being heavily dependent on fossil-fuel energy, smog impacting quality-of-life in key Polish cities, and the still limited public agenda and care in respect to climate change.
The new growth model will stay with us for some time ahead, therefore it is critical that we embrace the diversity and unpredictability of the world we live in. For businesses, this means controlling what we can control and adjusting to things that fall outside of our direct influence. In light of this, a huge area that we can and should impact will remain driven by the ESG agenda, assuring its incorporation into our business and investment decisions. Ultimately, it will not only gain in importance but – in the longer term – become our mission and main competitive differentiator, allowing us to better weather the cyclical slowdowns and storms that will forever accompany our businesses.
Let’s say this loud: we have now entered a time of noticeable global economic slowdown. Fortunately, it does not bear the signs of a crisis