Ukraine, pandemic, herald major market shifts

Demographics and rising market volatility are leading us into a New Normal world which will see the end of globalization, whilst accelerating the transition to the Net Zero economy. Companies and investors need to develop new, future-proof, business models – as I discuss in my new analysis for ICIS Chemical Business.

In the short-term, they will need to be resilient – to survive the coming recession in good shape. At the same time, they will need to be repositioning themselves to exploit the major new opportunities around the corner

“We are living through a watershed era. And that means that the world afterwards will no longer be the same as the world before.

This insight from German Chancellor Olaf Scholz’s historic February speech to the Bundestag highlights the challenges we face.

First, we had the Covid-19 pandemic. It has killed millions of people, and created chaos in supply chains. Then we had war in Ukraine and major sanctions against Russia. This will accelerate localisation and the transition towards a Net Zero economy.

Now the third Horseman of the Apocalypse seems set to appear:

  • Not only are fertiliser costs spiralling along with natural gas prices
  • But Ukraine and Russia account for 29% of global wheat supply.

So there is an increasing risk of famine in certain parts of the world.

Where do we go from here?

Clearly the unique period of the BabyBoomer-led SuperCycle has come to an end. Favourable demographics led to a 35-year period of virtually constant growth between 1980-2015, as the number of young Wealth Creators (those aged 25-54), doubled from 1.5bn to 3bn.

But today, the collapse of fertility rates and the rise in life expectancy means that the ageing Boomer Perennials (aged 55+) now account for the majority of global population growth. They already own most of what they need, whilst their incomes decline as they enter retirement.

Unsurprisingly, therefore, as John Richardson and I forecast in our book ‘Boom, Gloom and the New Normal’, social unrest is rising within countries, and between countries. The SuperCycle created a larger “economic pie”, so everyone could benefit.

But now, the size of the pie is starting to decline, and we have reverted to the pre-SuperCycle model where different groups fight to increase their share of it. Globalisation, based on supply chains that linked producers with world-scale plants to their customers, has reached its “sell-by date”.

Rising volatility in energy markets and interest rates is another sign of the paradigm shifts underway:

  • In the space of just two years, Brent oil prices have risen from $16/bbl in April 2020 to $139/bbl last month
  • Interest rates have also been giddy, with the benchmark US 10-year Treasury rate rising from 0.4% to 2.4%.
  • And inflation has taken off around the world, due to the Covid-induced supply chain chaos and the rise in energy prices.

These developments confirm Scholz’s sense that we have reached a watershed moment. And as the International Energy Agency has warned, Net Zero needs require us to develop new business models based on accelerating the transition away from fossil fuels.

We need to rethink the way we do business, if we want to be successful in the future.  The Winners in the future will be those companies with locally-based production and a more sustainable and circular way of operating.

Scenario planning, with a wide range of potential outcomes, will also be key to success given today’s levels of volatility. We can no longer simply tweak a base case to reflect whether we are feeling optimistic or pessimistic.

Financial risks are increasing

Unfortunately, energy and financial markets are adding to the risks ahead.  Oil prices at current levels – they now account for more than 3% of global GDP – have historically led to recession, as the chart confirms.

The reason is that consumers have to cut back on their discretionary spending, which drives economic growth, in order to heat their homes and travel to work and school. Today’s high levels of natural gas prices add to this risk.

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