“Prediction is very difficult, especially if it’s about the future” is a famous quote attributed in different forms to people ranging from Niels Bohr, the great physicist and Nobel Laureate, to Yogi Berra, the all-time great baseball catcher. But, that has never deterred predictions, especially economic predictions, as a universal beginning-of-the-year pastime.
Ruchir Sharma on 2022
Chief Global Strategist with Morgan Stanley Investment Management, Ruchir Sharma is author of a few bestsellers has ventured to forecast what is in store for global economy in 2022. Sharma’s list of “Ten economic trends that could define 2022” (Financial Times dated 4 January 2022) is available here. A look at Sharma’s economic predictions with comments follows.
The first of economic predictions is baby bust. As Sharma puts it, “Couples had ample opportunity but apparently lacked the desire to bring kids into a shutdown world.” The drop has been dramatic in China. My state of Kerala has predictably followed and the results were out a few days back.
In my view, this has more to do with a dread of having to visit doctors and hospitals in a pandemic world. This also explains how anecdotally I have been told that people visiting hospitals for other ailments have also come down dramatically. They would rather postpone treatment than run the risk of infection.
But, Sharma predicts that the labour force will shrink further, with 51 countries reporting shrinking working-age populations, three times higher than what it was at the turn of the century.
Peaking of China
Secondly, punning on the old spelling of China’s capital, Sharma predicts that “China may have peaked as an engine of growth.” China’s GDP is already at a quarter of global GDP in 2021, down from one third before the pandemic. China’s links with other emerging economies is loosening as seen from decreasing correlation in GDP growth. This trend, according to Sharma, would gain force aided by baby bust, rising debt and increasingly sharp turn from trade to “self-reliance”. Is China perhaps unwisely becoming more autarkic as in earlier decades?
In the mid-1990s, no country had total debt above 300 per cent of GDP. Now there are 25 such countries. This trend increased recently due to the pandemic, and is likely to continue.
Higher inflation, but not as in 1970s
Sharma says that “Fewer workers, more government spending and rising public debt all point to higher inflation.” But, he does not expect this to be as high as the 70s.
To me, the causality is not all that clear. Why fewer workers? Fewer workers also means less demand? How is more government spending aimed at compensating for decreased private spending inflationary?
But, he expects inflation to be not high as government spending should ease. Moreover, technology will cap prices. By this, he probably means only commodity prices.
He sees a bigger risk in asset prices. With financial markets four times the global economy, deflation should follow as prices stabilise.
Fight against global warming is creating a version of inflation in commodity prices, now referred to as greenflation. This works through increasing demand for green metals such as copper and aluminium, and reduced supply of raw material. The latter is due to decreasing investment in mines and oilfields in the face of an uncertain future. Greenflation has just seen the biggest rise in five decades, a trend set to continue.
Productivity paradox, also called Solow paradox (after Robert Solow), refers to weak productivity despite technological progress and adoption. The phenomenon is attributed to Robert Solow, Nobel Economics Laureate of 1987, who famously observed that “You can see the computer age everywhere but in the productivity statistics.”
Increasing digitalisation, given a boost during the pandemic lockdown, has not put a halt to decreasing productivity. As against hopes, working from home has not increased productivity. On the other hand, people put in longer hours for lower output. Sharma expects this productivity paradox to persist.
Sharma sees the virus turning the world inward. Going with this trend, governments especially in China, Saudi Arabia, and India, are blocking storage of data across borders, the only one but for government intervention the flow has not decreased.
Classic bubble characteristics of prices doubling in 12 months and manic trading have affected cryptocurrencies, clean energy, startups with no earnings and SPACs (Special Purpose Acquisition Companies). During 2021, all fell more than 35 per cent a threshold beyond which they don’t recover. But, Sharma finds a silver lining that a few potentially giant survivors in the tech industry may be left behind.
Frenzied stock buying in the recent past, when millions became first time investors, is not likely to last. This cooling will affect those stocks most popular with this set of new retail investors.
The last of the economic predictions relates to metaverse and the physical universe. The Oxford English Dictionary defines metaverse as a “virtual-reality space in which users can interact with a computer-generated environment and other users.” The hype around metaverse, with Facebook also rechristened as Meta, has not spelt doom for the physical world. Housing market is on the rise. Automation, artificial intelligence, and electric cars will still push up commodity prices and demand for jobs seemingly affected by automation. Sharma gives the example of truck driving, and concludes, “Requiems for the tangible are premature.” I would like to add, so are predictions, even for the short term of one year.
What do others say?
The Guardian quoted the Center for Economics and Business Research as predicting that the global economy will grow by 4%. The year, according to it, will be marked by efforts to fight inflation and climate change. Stock markets will be weak. Their report predicts wages in the UK to rise with declining unemployment and rising vacancies. The New Yorker summed up the views of “professional economic prognosticators” to forecast another year of strong recovery from the “virus-induced slump.”
Sharma prefers to remain in his comfort zone on which he has written a lot. He does not come out with numbers on GDP growth or inflation. Maybe that is deliberate.
At the same time, I wish he had commented on matters which have a bearing on economic predictions. For instance, will the pandemic end in 2022? If not, what shape will it take? Will there be a Great War? Where will the dollar be, not in terms of exchange value, but in its position as the currency of the world? What shape will cryptocurrencies take? Will CBDCs be a success? How will increasing use of electric cars affect the Middle East? Will China show signs of breaking up?
At the end of the short essay, I cannot say with confidence that I am any wiser. Maybe one can identify with three or four. One or two others are too obvious. As for the rest, I am reminded of a Galbraith saying, “We have two classes of forecasters: Those who don’t know — and those who don’t know they don’t know.”
© G Sreekumar 2022
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