In the words of French humourist Pierre Dac, forecasts are difficult, especially when they relate to the future. Indeed, rarely does the future turn out exactly as forecast; forecasts often tend to be very pro-cyclical. Forecasters’ perceptions are regularly impaired by the prevailing mood. Periods of euphoria translate into highly optimistic growth expectations, with the temptation to stretch them to extremes, while a mood of prevailing pessimism results in a forecasting race to the bottom. As regards the more distant future, forecasts tend – rather unoriginally – to anticipate a return to some form of equilibrium: an ideal long-term vision of growth underpinned by steady and continuous full employment… which, of course, is a theoretical assumption that rarely becomes an economic reality.
In spite of these various pitfalls, the art of forecasting is useful and even necessary when putting together business plans or defining strategic goals. In drawing up the Medium-Term Plan (MTP), the Group’s forecasters have embarked upon this perilous exercise of forecasting with a great deal of humility, though not without conviction. The central assumptions of the MTP’s economic and financial scenario are shaped by three core elements:
Firstly, the sluggish growth currently prevailing in advanced economies is here to stay. The unprecedented industrial revolution we are living through, combining artificial intelligence, robotics and the digital economy, is profoundly changing our economic structures. On the one hand, industry is declining but hyper-productive, with machines taking over work previously done by people; on the other, the services sector is bloated, greedy for manpower but less productive. This structural bias towards less productive activity bodes ill for growth, especially given that the digital era is more akin to a revolution in behaviours, reorganising how value is shared out rather than creating value per se. Nor will salvation come from outside. The current rebalancing of China’s growth model towards consumption and services is synonymous with a slowing economic trend and a loss of traction for the rest of the world.
Secondly, inflation is likely to stay off the radar. Globalisation and the integration of low-cost countries into global value chains remain powerful drivers of disinflation, with an inexhaustible search for competitiveness putting pressure on prices and wages, especially at the lower end of the qualification ladder. Innovations driven by the onslaught of digital technology are driving prices down. Service platformisation – resulting in fewer intermediaries all along the value chain – and task automation are helping lower costs and prices. The digital revolution, skewed towards innovative capital and qualified labour, is also leading to labour market polarisation and growing wage inequality. The gradual loss of intermediary jobs and their replacement by less secure and less well-paid local service jobs will hamper global wage momentum and moderate prices for a long time to come.
Lastly, interest rates are set to remain lastingly low. Weaker nominal growth is leading to a parallel reduction in long rates. In the absence of inflation, central banks can maintain highly accommodative monetary policy without reneging on their mandate of providing nominal anchors. Long-term interest rates – which, as it were, reflect expected future short-term rates – thus have no reason to rise, in turn supporting the mountain of debt which, globally speaking, is reaching worrying proportions. Moreover, with ageing households in advanced economies saving for retirement and households in emerging countries building safety buffers for lack of any social safety nets, global savings remain plentiful and continue to seek risk-free assets, including in particular high-quality sovereign bonds, whose yields are sagging under the weight of excess demand. At the same time, the search for returns amid abundant cheap liquidity should continue to flatten the hierarchy of yields, often in defiance of risk, thus fuelling sporadic corrections of financial excesses.
While our overall scenario reflects this “new normal” that combines mediocre growth, low inflation and low interest rates, there is no shortage of genuine reasons for concern, mainly thanks to political disruption.
We have moved into a long political cycle where political priorities are taking precedence over the economy. On domestic political stages, social conflict is mounting. Anxiety and fear among those most vulnerable in the face of major economic and societal change provide a breeding ground for populists. The latter’s divisive rhetoric mixes with collective anxiety, resulting in increasingly polarised opinion that undermines social cohesion and jams up democratic mechanisms. Outside, the global geopolitical scene is being disrupted by the weakening of multilateralism. The current reshuffling of the geopolitical deck marks the end of the United States’ unrivalled leadership faced with the new hegemonic power, China. Economic warfare, technological supremacy, control over maritime areas and natural and energy resources, competing ideologies… These are all instruments in the hands of those seeking power, with geopolitical, geo-economic and geostrategic issues now indissociable. This great return to politics as the arbiter of international relations, with multilateral mediation replaced by power plays, risks fuelling disorder and instability.
As the world thus becomes increasingly complex, we are going to have to learn to live with a structurally high level of uncertainty which, while it cannot be numerically reflected in any central scenario, must remain at the forefront of our collective consciousness as we prepare to implement a medium-term strategic plan.
Isabelle JOB-BAZILLE, Chief Economist of Crédit Agricole Group