The Rebalancing World

Influence can come in the form of a crisis or event but can also develop over time. The same can be said about influence’s decline. The world is entering another fascinating decade of geopolitical and economic change that will certainly rebalance the world’s influencers. International governing bodies are experiencing increasing levels of infighting and ineffectiveness. Low growth and global distrust could very likely persist for years to come.

What must we do to keep a steady footing as the world rebalances?

Rebalancing world - FACTS
  • For the 110 Chinese companies in the Fortune 500, 80% of their revenue is earned domestically.5
     
  • In Germany, an estimated one in three companies has major Chinese customers, and around 80% rely on Chinese suppliers – significant exposure in the event of Chinese disruption.73
     
  • As China’s middle class grows, more consumers will travel abroad, creating even more global dependencies on China for one of the world’s largest sectors: tourism. 

The slowing ’20s: Low growth and global distrust

  • 1913 U.S. Federal Reserve System is created
  • 1990 The Lost Decade begins in Japan
  • 2007 The Great Recession begins (December)
  • 2010 European sovereign debt reaches crisis
  • 2014 European Central Bank introduces negative interest rates
  • 2015 Refugee crisis spreads across Europe
  • 2019 COVID-19 cases emerge

Current events

"Me first": Retreating from the globalized market. Nationalist and populist movements have been gaining traction globally. Some citizens are losing faith in the international community to provide growth, prosperity and stability. Globally outsourced manufacturing and slow-moving international governance has driven some Western agendas, including the U.S., U.K., Italy and Greece.55 Export-dependent countries suffer from these actions, including those receiving production from China (South Asia, Southest Asia, Africa). The post-WWII philosophy of global peace interwoven with global commerce has been chipped away by a "fair for me" position. 

Grappling with a shrinking, expensive labor force. Labor costs have been rising, driven by a shrinking labor supply in developed countries56 and the expanding middle class in China.57 Prolonged periods of economic growth lead to steady, continual wage increases,58 yet a higher cost of labor leads to reduced funds available for business investment, further slowing growth. European employers have experienced some relief from this trend as a recent influx of immigrants increased the labor supply.

The labor market will be severely impacted by the recession stemming from the COVID-19 health crisis. Individuals being furloughed or laid off are those who have been in high demand building products or providing services that generate revenue. The rise in unemployment and need for income has increased the pool of available workers, but with the consumer demand depressed across numerous industries, any recent increases in labor costs will be erased for the foreseeable future.59

Ineffective monetary policy. “How low can we go?” Central banks have been asking this question for some time. The recent bull market was unprecedented, and monetary policy leaders were largely able to keep the global economy expanding, even as signs of weakness began to emerge.60 That said, as interest rates approach 0%, what was once a lever to stimulate economies is now ineffective and will be unable to hold back a recession. Japan has experienced this stagnation, with interest rates near 0% for decades.61

Diverging immigration policies. Immigration has been a hot-button issue globally for millennia, no less so in the last two decades. Whether driven by conflict, humanitarian crisis or personal desire, people continue to uproot their lives in search of a better life elsewhere. Subsequently, strife and contention mount in that “elsewhere.” Global distrust and nationalist or populist ideology have fueled the closing of national borders, while the economic pressures of aging populations and a shrinking labor force have encouraged the opening of others. In the way that slowing global commerce hampers global economic growth, so does slowing the free flow of people, as workers willing to take unfilled jobs are prevented from relocating to do so.

Physical distancing, closed borders and travel restrictions will significantly impact immigration trends. Those countries previously open to immigrants have closed their borders to contain the spread of COVID-19. International travel will continue to experience significant restrictions even when domestic activity and travel resume. This reality will further hinder economic recovery – especially in emerging markets – as travel, tourism and import-export markets remain depressed.62

Future expectations

As early as 2015, the economy was showing signs of vulnerability. Lower consumer spending and lower production depressed growth in China. The economic benefit from refugees entering the European labor force and the Trump administration's tax reform and deregulation measures only delayed what was coming — and COVID-19 was the shock to send an already-strained economic structure toppling. In light of this new economic reality:

  1. Business, individual and government behavior will evolve
  2. Interest rates will remain low
  3. Domestic issues will become the focus of politicians
  4. Recovery may take years 

As with any recession, companies will jettison excess expenses, streamline portfolios and reduce capital tied up in supply chains.63 Individuals will reduce personal expenses, focusing on essential purchases.64 The cost of labor will drop, and with oil prices remaining lower, so will the cost of production inputs.65 Businesses that survive will evolve as customer needs evolve through the crisis. 

Interest rates will remain low for the foreseeable future. Fiscal policy or national (and international) aid will be more efficiently deployed based on learnings from the 2008-2009 recovery playbook, but economic recovery will likely be a prolonged process, and companies should prepare accordingly. An external force will likely be required to restart growth, as the fracking boom did in the U.S. following the 2008 recession. 

To recover, countries will focus on stabilizing domestic economies, not on foreign investment or global issues.66 Because of this and preexisting nationalism, companies may need to think about how supply chains and management structures can become sufficiently local in the "me first" era to avoid public backlash.67

Economists’ outlook on recovery timing is varied. Some expect two to three years before GDP and unemployment recover, and to that extent, over a staggered timeline.68 The 2010's recovery leaned on the service sector until the manufacturing sector recovered, but COVID-19 has halted essentially all activity, and both the individual and corporate ramifications will be felt for years to come.