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Watch Out For Falling Trees

History tells us that the field of economics was split into macroeconomics and microeconomics on the back of the Great Recession. From then onward, the two professions, while directly connected, have been strangely operating in isolation.

Attempts by mavericks to bridge the two worlds have repeatedly failed (see Behind the Curtain,’ 2018). The reasons include disagreement between economists on the relevant linkages, the exponentially growing complexity arising from modeling the two fields, and intellectual parochialism. The macro people dealing with the forest and the micro people concerned about its trees are different species that do not communicate.

The current macroeconomic trends are easy to buy into. As outlined in the latest World Economic Outlook(Oct’ 21) by the IMF, the world is pursuing its recovery following the health crisis, as any patient would. Capital expenditures are expected to kick in as the global economy moves further into the new cycle, putting a spotlight on cyclical stocks and Europe (a late-cycle region). To achieve a full recovery, global GDP is expected to grow at about 5% in 2022.

After seizing in 2020, the global economy is having to deal with a mismatch between a constrained supply and an accelerating demand, including in the labor market. The friction is temporarily heating up inflation. While many headline-grabbing pundits, including Larry Summers and Martin Wolf, are not prepared to put the latest inflation data in the proper perspective, the trend is deemed to be transitory. Critically, long-term inflation expectations will remain firmly anchored at about 2%. How could anyone assume that central bankers will run the risk of damaging more than a generation of hard work?

The world economy is mean-reverting to its 3.5% annual growth rate. Unconventional monetary policies have become conventional by now. Fiscal policy is only slowly turning counter-cyclical, if at all. The risks include, as usual: a central bank mistake – though no one can define what would constitute such a faux pas – and the perennial China unknowns. Indestructible virus variants and World War III are only topics for those eager to scare themselves. From a macro perspective, the only thing to worry about is how boringly normal 2023 is set to be.

Unfortunately, the view from a microeconomic perspective is less benign. Many industry segments across power, agriculture, buildings, mobility, and manufacturing will experience highly disruptive supply/demand imbalances as they undergo a profound transformation from unsustainable to sustainable products, services and/or operations over the coming years. The implications for economic growth and inflation cannot possibly be anodyne (see ‘The Supply Chain Massacre’).

Furthermore, social inequalities, having received a significant boost from the crisis, could lead to rising tension in the labor market and political uncertainty. The implications for redistributive policies are welcomed but they will also be eventually disruptive at the macro level.

2022 is presented as a nice walk in the forest. The global economy will be lucky not to be hit by falling trees.

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