From early on, it was clear that the pandemic was less likely to “change everything” than to accelerate many trends already underway – and so it has. Two of the most important trends in this category are the expanding role of government and of digital technology as drivers of economic growth and market returns. As these trends develop, they are likely to reshape the world as we knew it before and during the pandemic. But to start with, 2021 is, in more ways than one, likely to look like a mirror image of 2020.
Trend 1: Surging Economy, Soggy Markets
In 2020, the global economy contracted by 4 percent, the worst downturn since World War II. Yet, stocks rose 13 percent worldwide and nearly as much in India. Why this unprecedented market boom in a recession?
Early on, governments and central banks rolled out unexpectedly massive stimuli to keep businesses alive. Compared to other emerging countries, India’s government spending was lighter than average but its central bank stimulus was four times more generous, amounting to 6 percent of GDP.
As a result, after the flash crash in March, investors quickly came to see the pandemic as a passing natural disaster, not the kind of long-term shock generated by financial crises. Sheltering at home, people spent less, saved more – and a good chunk of those savings went into the markets. Sports bettors turned into first-time day traders.
Now, consensus forecasts show that analysts expect both the economy and markets to surge in 2021, but the forces that lifted markets last year are unsustainable.
Stimulus campaigns are likely to continue, but not at anywhere near the record pace of spending and money printing seen in 2020. The passing of the pandemic is already factored into market valuations, which are back to record highs. With vaccines rolling out, savings are likely to come down as people venture back into the real world to travel, dine and shop. The result: this year could play out as the opposite of last year, with markets moving sideways amid the economic recovery.
Trend 2: Inflation Bottoms
When the pandemic hit, consumer price inflation had fallen worldwide from highs around 15 percent to less than 3 percent, where it had been stuck for the last 20 years. Many policymakers had come to assume that the cancer of inflation was gone, even as the forces constraining it were beginning to give way.
Growth in the global working-age population turned negative around 2005, and a declining labor supply tends to increase wages. Growth in global trade started to slump after the crisis of 2008, reducing competition. Declining productivity was raising business costs, adding to the upward pressure on consumer prices.
That was the situation when the pandemic hit. Policy-makers began printing and borrowing money at a record pace, confident they could do so without reviving inflation, which appeared to be long gone. More likely, it is just in remission. And the Four Ds – depopulation, deglobalization, declining productivity, and rising debt – could be the jolt that revives the threat.
Last year, despite the historic economic downturn, inflation barely receded worldwide. India’s inflation rate, which was pretty average from 1980 to 2010, rose to among the higher rates in the world in the 2010s, and now at near 7 percent ranks second-highest among large emerging economies, after only crisis-prone Turkey. India, in particular, needs to be aware that this cancer is raising its ugly head again.
Trend 3: Easy Money Dries Up
In the early 1980s, central banks began to win the war on consumer price inflation. Since then, central banks gradually lowered the rate they charge on short term loans to commercial and retail banks from a peak of 13 percent to 2 percent, on average, at the start of 2020. In 2020, central banks cut that short-term rate in half, hoping to encourage banks that serve the public to keep loans flowing despite the Covid crisis.
The result of all that easy money pouring into the financial system was that investors could easily borrow money to make more. And so they did, generating a multi-decade run of inflation in the price of assets, including bonds, stocks and (in most countries) houses. In 1980, the total value of global financial assets was roughly equivalent to global GDP; today, it is about four times higher. Since the top one percent own more than half of all these assets, the rich gained most, exacerbating wealth inequality and the populist revolts against it.
If and when the return of consumer price inflation compels central banks to tighten again, these trends could end or reverse. It’s not likely central banks will begin by raising short-term rates as early as this year. With one exception: India, where high consumer price inflation may force the central bank’s hand.
Others central banks are more likely to tighten first by dialing back on their new role as market buyers of last resort. In 2020, central banks around the world propped up the credit markets by buying $8 trillion in assets, ranging from government to corporate bonds: those purchases were more than twice the previous record, set in 2008, and 40 times what they purchased in 2019. Even a partial withdrawal of this massive stimulus could have sobering effect on markets.
Trend 4: A Good Time for Houses
The housing boom in the gloom of 2020 was as unsettling to many as the stock market boom, but there is one big difference – home prices are more likely to rise now. For one, more and more investors expect higher inflation and are buying assets that tend to rise with inflation including gold, silver, bitcoin and real estate.
The housing boom was strikingly broad, lifting prices in virtually every developed country at its peak, and though the market dynamics vary widely by country, there are reasons to believe the global boom can last into 2021.
Anticipating higher consumer price inflation, retail banks may start raising the rate they charge on long-term loans to the public as soon as this year. But with the rate on 30-year mortgages in Europe and the United States now at historic lows, a small uptick won’t choke the housing boom. On the supply side, home construction cratered after the global financial crisis, leaving inventories lean when the virus hit. And the demand from young families fed up with cramped spaces is likely to linger even after the pandemic dies down.
The moment may be even more propitious for home buyers in India, where housing prices have yet to recover from the 2008 crisis. The average price has fallen to around three times the average annual income, from a peak above five times, making homes more affordable now than at any time in at least 25 years. If buyers can lock in a fixed mortgage, before rates go up, their timing may well prove to be right.
Trend 5: The Post-Dollar World
Before the United States, only five countries had held the world’s reserve currency going back to the 15th century: Portugal, Spain, the Netherlands, France and Britain. Those reigns lasted 94 years on average; the U.S. dollar is now 100 years old. Advanced age alone was reason enough to wonder about the dollar’s future when the pandemic hit.
As the United States rolled out trillions in new spending to keep the economy alive, its debts to the rest of the world spiked to 67 percent of its economic output – way above the 50 percent threshold that has often signaled a coming crisis. In the past, financial empires, holders of the coveted reserve currency, often faltered when the rest of the world lost confidence that they could pay their bills.
Up to now, U.S. policymakers considered the dollar impregnable for lack of serious rivals. Europe and China aspire to challenge the dollar, but the world’s trust has been undermined by doubts about the reliability of Europe’s multi-national government, and China’s one-party state. This year, however, trust in all traditional currencies is being undermined by massive money printing: 20 percent of all dollars and nearly 10 percent of all Indian rupees in circulation were printed just last year.
The big surprise of 2020 was the emergence of a stateless cryptocurrency as a plausible alternative. The hottest investment of the year was Bitcoin, up 300 percent, boosted by distrust in the dollar. Bitcoin gained as both “digital gold”, a trusted store of value, and as a medium exchange with several large online payment platforms starting to accept it for the first time.
Skeptics still abound. Older people are ten times less likely to own cryptocurrency than 20- and 30-somethings, many of whom welcome digital currency as a tech-pop alternative to state-controlled currencies. But the message of 2020 to governments was clear: print money at your own risk, because crypto rivals are gaining traction fast.
Trend 6: A Commodity Revival
Prices for commodities like copper, wheat and soybeans have declined steadily in real (inflation adjusted) terms for the last century, but that long decline is punctuated by boom decades. We may be entering one now.
After falling in the 2010s, global commodity prices may revive in the 2020s, in part because they are denominated in dollars. A weaker dollar therefore means, almost by definition, higher commodity prices.
Moreover, the weak prices during the 2010s led to light investment and supply cuts in everything from oil fields to copper mines. Forecasters now say supply shortages of soy, sugar, gas, oil and copper are likely to grow in 2021.
At the same time, governments are pouring a chunk of their new spending into infrastructure projects, raising demand for building materials. They are also spending heavily on green electrification, raising demand for copper and other metals used in renewable power systems.
So, couple tight supply with rising demand in a post-pandemic recovery, and you have the recipe for a revival in commodity prices.
Trend 7: The Emerging Market Comeback
When commodity prices rise, the many emerging economies that depend on commodity exports tend to do well. That is the first of four reasons to expect a comeback for emerging markets, which just suffered their worst decade for stock returns since records begin in the 1930s.
Exports and manufacturing are both shrinking as a share of the global economy, which makes it increasingly difficult for emerging nations to follow the old export-manufacturing path to prosperity. But a select few are still expanding their share of global exports, led by Vietnam and some of its neighbors in Southeast Asia, and Poland and some of its neighbors in Eastern Europe.
Emerging countries tend to press tough reform only when their backs are to the wall, and few crises have pressed harder than the global pandemic. One reason is that, compared to developed countries they can’t afford as much stimulus to ease the pain of lockdowns, and have little choice but to tighten their belts in ways that could raise productivity and growth in the future, if not now. The result is a widely-overlooked wave of market-oriented reform from India and Indonesia to Brazil, Saudi Arabia and Egypt.
The pandemic is accelerating the adoption of digital technology everywhere, but this revolution is unfolding even faster in emerging countries than developed ones, and delivering a commensurately larger boost to economic growth.
Today, the United States accounts for 25 percent of the global economy and 56 percent of global stock market value; meanwhile, the top 27 emerging markets account for 36 percent of global GDP, and just 12 percent of global stock market value. When imbalances in the markets grow this extreme, they tend to shift back into balance, not grow more extreme.
Trend 8: Digital Revolution
To a surprising degree, less developed countries are already prematurely well-developed as internet societies, in part because their citizens are far less well served by landlines and bricks and mortar stores, banks, hospitals and schools. When they adopt digital services, they are leaving nothing familiar or beloved behind. Of the world’s 30 most digitized economies (by digital revenue as a share of GDP), 16 are found among the emerging markets including South Korea, Indonesia, Colombia, and above all, China.
With digital revenue amounting to 8 percent of GDP, China is already the most digitized economy in the world, and recent visitors are dazzled by the transformations. Robotic waiters, drone deliveries, and digital cash are already more common in the cities of China than any other country.
Though digital technologies are lowering the cost of launching and operating business everywhere, this process is fastest where the adoption of digital services is most rapid: the emerging markets. Digital revenue is growing at 11 percent a year on average in emerging markets, and even faster (13 percent) in India. That boost could help support a comeback in emerging markets, by helping them defy the global decline in productivity.
Trend 9: Rise of the Challengers
Over the last decade, for the most part, investors were drawn to just two countries, the United States and China, and one kind of company, tech giants. That is already starting to change. Monthly active user growth for giant, well-known social media platforms has slowed to single digits from 40 percent or better early in the last decade. E-commerce giants in both countries have made huge gains in recent years, but the market cap of smaller, popular rivals is growing faster. It is very possible that some of the challengers will catch up.
The lesson of the past is that tech giants often enable their successors: IBM made Microsoft possible. Today, eight of the world’s top ten companies by stock market value are in tech, the same share as at the height of the dotcom boom two decades ago, but only one company has survived on that list: Microsoft. Disruption among the giants is the norm.
Today, many internet giants are under increasing pressure from regulators, aiming to limit their monopolistic powers. And many are internet platforms on which start-ups thrive. From South Asia to South America, regional challengers are rising in e-commerce and social media, succeeding by catering more attentively to local taste than the American or Chinese giants can. Baby Amazons are rising from Eastern Europe to Southeast Asia, and some of them are likely to grow into giant adults.
Trend 10: The End of TV
It’s no secret that the pandemic has been good for online entertainment. As movie theatres shut their doors, total subscriptions for two popular streaming services rose from 230 million to 315 million in 2020. The big question is whether this shift online will slow down or continue when the pandemic passes.
One answer comes from the fate of older forms of home entertainment, which are equally safe from virus-carrying crowds. Instead of thriving under lockdown, however, the number of traditional TV viewers age 19 to 49 fell a striking 16 percent last year, accelerating a long-term trend. And that decline would have been even steeper but for the surge in TV news viewers drawn to the bitter 2020 U.S. presidential campaign.
One partial exception is India, where TV viewership is up 7 percent over the last two years. In other words, it is growing much less rapidly than digital forms of entertainment, but at least not shrinking yet.
Conclusion
Long term, I suspect what we will see is that the impact of the pandemic continues to expand trends that were already underway. Governments have set new precedents for intervening in the economy, leaving new benchmarks for the next big crisis. The foundations that boosted giants – the United States, the dollar, tech mega-companies – the story of the last decade will continue to erode. Older forms of entertainment, like movie theatres and broadcast TV, will continue to give way to the superior choice offered by digital options, including in India. The many human experiences that can’t be digitized – travel, dining out, working out in a gym, working in the office – will come back as before. The world beyond the pandemic will be different, but not as wildly different as some futurists imagine.
(Ruchir Sharma is a global investor and an author)
Disclaimer: The opinions expressed within this article are the personal opinions of the author. The facts and opinions appearing in the article do not reflect the views of NDTV and NDTV does not assume any responsibility or liability for the same.
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