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Text on screen: Kimberley Stafford, Global Head of Product Strategy
Kimberley Stafford: Joachim, in our recently published outlook, The Age of Transformation, we talk bout three big trends that we think will transform markets and economies. So can you talk about those trends and why they will transform the secular horizon?
Text on screen: Joachim Fels, Global Economic Advisor
Joachim Fels: I think what we're looking at now is a much more uncertain, more volatile and a more uneven environment for both growth and inflation.
So what's driving this? Well, we think we're in an age of transformation. There is the digital transformation. There is the green transformation and there is a social transformation going on. So maybe briefly on each of these three transformations,
Text on screen: Trend #1: Green transformation
Images on screen: Windmills, solar panels, electric car
if you look at the first one, that the transition from brown to green, what we are seeing is that many governments and also many companies are stepping up their investment and their efforts to get to a net zero world in 2050. Now that implies major investment in green energy and green infrastructure.
Images on screen: Oil and coal industries
On the other side of the ledger, we are seeing disinvestment in many of the so-called brown sectors and the risk of stranded assets. So I think the path to that net zero destination is going to be very bumpy, right? We may arrive at in a better and cleaner world, but the path is really full of pitfalls also for policy makers.
Text on screen: Trend #2: Digital transformation
Images on screen: Digital technology, computers
Then on the digital transformation, the pandemic really turbocharged digitalization and automation. So what we are already seeing in the data is that there has been a major ramp up in corporate spending on technology. We're also seeing a pickup in productivity growth. Companies have learned to do more with less, so that could lead to stronger growth over the next five years. But there's also a downside from this, the dark side of automation and digitalization is that many companies and also many people, many workers will be left behind, right?
Text on screen: Trend #3: Social transformation
Images on screen: Busy street, US Capitol
And then last but not least, the social transformation. There is an intense focus in China on common prosperity. Here in the US the current administration is also focused on addressing widening income and wealth inequality. That's part of the so-called soft infrastructure or human infrastructure package that is currently in Congress.
Just briefly, what does it mean for growth and inflation? On growth, I think we are looking at shorter economic cycles potentially with larger amplitudes. There's the possibility of an investment boom to bust cycle. Green investment, tech investment, for example.
Also we're looking for more divergence in growth outcomes across countries because these transformations happen at different speed in different countries. Different economies are affected differently by these transformations. And then last but not least, inflation is also likely to be more volatile. We may see more episodes of above target inflation, like the current one, but let's not forget, there may also be episodes over the next five years where inflation drops very sharply and we may even get into deflationary territory for some time.
Kimberley Stafford: Makes sense. So pretend to be for boom and bust growth cycles, you touched on inflation. Tiffany, maybe you can delve a little bit deeper there. What are the outcomes maybe to the upside and downside on inflation?
Text on screen: Tiffany Wilding, North American Economist
Tiffany Wilding: So these various transitions I think are inflationary, a couple of them being that the transition to net zero and in particular, the policies that really aim to get us there. So like carbon tax is a regulation, which has raised the cost of doing business, and so the extent to which that's passed on to consumers obviously will be more inflationary, but also these trends towards globalization.
Images on screen: Busy port, cargo ship
The recent supply chain issues of course, are causing companies to rethink their procurement and inventory strategies. They're wondering if more diversification in supply chains is necessary, but I also think the pandemic really highlighted some key vulnerabilities, like the healthcare sector where maybe more redundancy is needed across supply chains and all of that should be inflationary. And then the final thing that I would just highlight on the upside risks is it policy itself. And this has both fiscal and monetary policy, which is more focused on inclusivity. So you could see more activists fiscal policies, more expansionary fiscal policies to deal with these issues,
Images on screen: The Federal Reserve building
but also on the central bank side, what Joachim has actually characterized as mission creep by the central bank whereby they aren't as focused maybe on their inflation goals and they're more focused on creating an environment to reach maximum employment and to really to get at these inclusivity types of goals.
But I think that also, just as importantly here, is the downside risk to inflation. And I really think that this is a place that commentators are not as focused on these days, of course, in the context of very high inflationary prints. But I think it's just as important, and Joachim alluded to this as well, but the productivity and innovation trends that we're seeing, they should be disinflationary couldn't even be outright deflationary. Of course, companies are doing more with less, as Joachim suggested. But the other issue is that the increase in debt levels that we've seen as a result of this pandemic, both private and public they can create some fragilities, in particular in the event of a negative economic shock higher leverage of course, necessitates more de-leveraging during that point in the cycle, which can be deflationary. So I think all of these trends really increase the uncertainty around this. But despite all this uncertainty, I think maybe there is one thing we can be relatively certain about, it's this new normal period of sort of stable, low inflation is probably behind us.
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