If you’re a globalist, someone who believes that humanity can best prosper from the abundant flow of goods, ideas, and people across international borders, it’s been a dark decade. And getting darker.
Driving the news: The list of affronts to a vision of liberal internationalism grows ever longer. Xi and Putin. Brexit and Trump. Bolsonaro and Erdogan and Orbán. Pandemic-closed borders, and now war in Eastern Europe.
Why it matters: As countries feel a greater need to become more self-sufficient, that means throwing away some of the benefits of interdependence, which could shape the global economy of the 2020s and beyond.
It is the “corrosion of globalization” as Adam Posen, president of the Peterson Institute for International Economics, puts it in a humdinger of a trial in Foreign Relations.
- “It now seems likely that the world economy will actually break up into blocs,” Posen writes, “each trying to isolate itself and then lessen the other’s influence.”
- “With less economic interconnectedness, the world will see lower trend growth and less innovation,” he continues. “Established domestic businesses and industries will have more power to demand special protections. Taken together, real returns on investments made by households and corporations will decline.”
Retrospective scene: For years, companies with complex multinational supply chains have faced unexpected costs. First there were the Trump tariffs, applied to different product lists and import sources with little warning.
- The pandemic, with its lockdowns and extreme travel restrictions, was even more disruptive, as confirmed by continued shortages at US car dealerships and on store shelves.
- Now the price of oil and agricultural commodities has skyrocketed, and with Russia cut off from the world economy, there is the possibility of sustained shortages of crucial industrial materials, including nickel, palladium and neon.
this is forcing companies shift from an emphasis on “just in time” to “just in case,” as Atlanta Fed President Raphael Bostic said in a speech this week. That is, they are increasingly willing to sacrifice efficiency for reliability.
Leading investors they are coming to the same view. BlackRock boss Larry Fink writes in a new letter to shareholders that the war in Ukraine “has put an end to globalization” experienced in recent decades.
- Howard Marks of Oaktree Capital writes in a new investor letter that this era of globalization has been a boon to world GDP, but that moving away from it can “improve the security of importers” and “increase the competitiveness of onshore producers and the number of domestic manufacturing jobs.”
The bottom line: The global economy of the 2020s looks quite different from the world of the previous three decades, in ways we are only beginning to understand, but which could have profound implications for macroeconomic policy.
For all the difficulties faced by economic policy in the 2010s, there was one saving grace. The twin problems facing the US and other advanced nations – too high unemployment and too low inflation – had the same solution: more stimulus.
- But that era could be over. Mark Carney, former governor of both the Bank of England and the Bank of Canada, argues that the forces, including the collapse of globalization, mean new and less attractive trade-offs.
State of the situation: If Carney is right, interest rates and inflation will be persistently higher in the next decade than we are used to, and current policymakers have yet to adjust.
The panorama: When demand collapses in the economy, for example because a financial crisis rips through, it tends to reduce both inflation and employment at the same time. As a result, the stimulus helps both borders at once.
- Indeed, according to the central bank’s dominant models, the same policies should deliver both full employment and constant 2% inflation.
- Economists call this “divine coincidence.”
But when the problem it is a shock to the supply side of the economy, for example a pandemic disrupts global supply chains, more stimulus aimed at helping people work also tends to worsen inflation.
- That is the world we live in now. “Just as globalization was deflationary, its reversal will be inflationary,” Carney said in a speech at the National Association for Business Economics this week.
climate adaptation over the next decade it will also influence inflation and interest rates, he argued.
- Investment in energy infrastructure will need to increase in the neighborhood of two percentage points of global GDP per year through 2050 to avoid the most serious implications of climate change, according to IEA estimates cited by Carney.
- This will increase inflation in the short term, he argued, and increase the neutral interest rate in the long term.
The bottom line: “The economic environment now is very different than it has been since the global financial crisis,” Carney said. “Poor demand and divine coincidence are out, offset-inducing supply shocks and evil coincidence are in.”