Deglobalising, fast and slow

Deglobalising, fast and slow

The financial crisis of 2008-09 brought an end to a long period of rapid globalisation. In its place has emerged protectionism, heightened focus on national security, and increasingly strained international relations.

• Three fundamental forces explain this shift from hyper-globalisation to deglobalisation.

• First, China's emergence as a global superpower has transformed international relations. The West now views China as both an economic and strategic competitor, ending the earlier optimistic view that trade and engagement would naturally lead to economic liberalisation and mutual benefits.

• Second, complex global supply chains, optimised for efficiency in calmer times, have proven vulnerable to major disruptions. The pandemic and Ukraine war exposed critical weaknesses, leading to shortages in semiconductors, medical supplies, grain and energy.

• Third, persistent slow growth in western economies since the financial crisis has eroded faith in the liberal economic order. This has fuelled the rise of challenger political movements, primarily but not exclusively from the right, as evidenced by recent gains in French and European Parliament elections.

• Geopolitical risk is back. The US and China increasingly vote on different sides in the UN. A near tripling in the number of countries subject to western financial sanctions since 2010 testifies to growing international discord. The war in Ukraine means that casualties in conflicts between states have reached the highest level worldwide in at least 50 years.

• Geopolitical shocks are not necessarily economic shocks. The invasion of Ukraine, by triggering an energy crisis in Europe, most certainly was. The 9/11 terrorist attacks were not. Despite triggering two major wars, in Afghanistan and Iraq, they had little lasting economic impact on the West.

• Incremental change, the stories that don’t make the headlines, often have greater economic effects. Thus rising international tensions have contributed to a weakening of cross-border capital flows and investment and created a more difficult climate for trade. Western sanctions against Russia forced a profound change in patterns of trade in oil and gas. Ever since Donald Trump’s first administration in 2017, America has been seeking to reduce its reliance on high-end Chinese technology and manufactured goods. The EU wants to create its own semiconductor manufacturing industry to avoid being dependent on Taiwanese products.

• China’s vast trade surpluses – and its role as the world’s leading manufacturing power – have led some in the West to conclude that the international trading system is not working. Deindustrialisation in Europe and the US has created a coalition of ‘left behind’ workers, industry leaders fearful of unfair competition, and military strategists who fear that the loss of an industrial base would prevent the manufacturing of the arms necessary to defend the nation in times of war. China’s success in creating world-leading automotive and battery industries – helped by subsidies, support for local suppliers and the exclusion of foreign competitors – has encouraged the US to follow suit with its own programme of subsidies and tariffs.

• Just as the economic liberalisation of the 1980s to early 2000s helped drive global growth, today’s economic distancing is acting as a drag on activity.  Over time these changes are driving a shift to a more fragmented or multipolar world. In shorthand this is deglobalisation. It’s the term we use, even though it doesn’t quite capture the way in which some connections, such as migration or trade in services, are continuing to grow.

• So what conclusions can business leaders draw?

• First, the geopolitical and other shocks of recent years have exposed weaknesses in systems – from Europe’s energy network or its capacity to produce munitions – that were previously hidden, tolerated or ignored. Elevated geopolitical risk demands more resilient systems and processes.

• Second, countries, such as the US, with its vast internal market and limited exposure to foreign trade, are better placed to cope with deglobalisation than economies, such as Germany and China, with their large trade surpluses and dependence on exports.

• Third, the definition of strategic products is expanding. Twenty years ago few would have considered cars to be of strategic importance. The scale and low-cost base of China’s auto sector has changed that. Greater risk and rising geopolitical rivalries mean a growing focus on the security of supply and domestic capacity.

• Fourth, and crucially, globalisation may have slowed, but it is far from dead. The world is no less dependent on trade or cross-border supply chains today than it was before the financial crisis. Trade deals – such as the African Continental Free Trade Area – continue to be struck. Levels of migration remain high. Innovations in technology and communications make it easier to sell services across borders. 

• The global economic system is changing. It’s a process that has further to run.

OUR REVIEW OF LAST WEEK’S NEWS
The UK FTSE 100 equity index ended the week flat at 8,502.

Economics

• In his first week in office, US president Donald Trump warned that the US may impose 25% tariffs on US imports from Mexico and Canada from 1 February and impose tariffs of up to 100% on Chinese imports if TikTok’s Chinese parent ByteDance fails to divest the short-form video platform
• Canadian prime minister Justin Trudeau said that Canada would retaliate if Mr Trump imposed tariffs on its exports
• US stocks rose to their most expensive level relative to US government bonds since the dotcom era of 2002
• Early estimates of business activity in January from surveys of purchasing managers indicated continued growth in the US, a marginal increase in the UK and a return to growth in the euro area
• UK consumers have caught the “January blues” with consumer confidence falling this month, according to surveys by the British Retail Consortium and GfK
• UK wage growth accelerated to 5.6% in the three months to November compared with the same period last year, according to official estimates
• The UK unemployment rate marginally rose to 4.4% in the three months to November, however estimates are still uncertain due to low response rates to the survey 
• The Bank of England is considering creating a “concierge service” to support foreign companies in establishing UK operations in response to the government’s call for proposals to boost UK growth 
• UK chancellor Rachel Reeves welcomed proposals by the Financial Conduct Authority (FCA) to relax limits on mortgage lending in a bid to increase homeownership
• The FCA called for the UK government to define a “metric for tolerable failure” regarding its proposed relaxation of financial regulations amid warnings that the government’s calls for more risk-taking could increase fraud
• The UK government borrowed a more-than-expected £17.8bn in December, the third-highest December on record. Government borrowing costs fell from their recent highs earlier this month
• Hedge fund founder Ray Dalio warned that the UK may be heading for a “debt death spiral” whereby additional government borrowing is required to service increasing interest costs
• UK housing affordability improved last year due to falling borrowing costs and wage growth outstripping house price growth, however affordability remains strained by historical standards, according to Nationwide
• UK manufacturing sentiment fell at the fastest pace in two years in January, according to the Confederation of British industry
• S&P reported that UK businesses are reducing staff numbers at the fastest rate since the global financial crisis in 2009 other than at the onset of the pandemic in 2020
• Euro area consumer confidence improved in January in line with expectations
• German economic sentiment worsened more than expected in January, according to ZEW, underscoring the country’s current economic weakness
• New car registrations increased marginally in the EU last year, to 10.6m, with strong growth in Spain offset by declines in Germany, France and Italy
• The EU is exploring options for electric vehicle subsidies to boost demand, the FT reports
• The Bank of Japan increased interest rates to 0.5%, the highest level in 17 years, as consumer price inflation remains above the Bank’s 2% target
• Chinese authorities told local insurers and mutual funds to increase their holdings of domestic equities in a bid to support the stock market and boost confidence

Business

• European banks are forecast to pay out €74bn in dividends for 2024, surpassing their pre-financial crisis peak for the second consecutive year, according to UBS analysis
• The UK Competition and Markets Authority (CMA) launched investigations into the level of competition between and within Apple and Google’s “mobile ecosystems”, which include operating systems, app stores and browsers
• Apple is facing a criminal probe in Belgium over allegations of sourcing “blood minerals” from the Democratic Republic of Congo 
• Mr Trump signed an executive order to pause the release of investment funding for green infrastructure, amounting to more than $300bn
• Technology companies OpenAI and Oracle and investors SoftBank and MGX announced a joint venture to build AI infrastructure in the US, worth up to $500bn 
• Crown Prince Mohammed bin Salman said that Saudi Arabia plans to invest $600bn in the US over the next four years
• Renewables energy company Orsted announced $1.7bn of impairments for its US business due to “market uncertainties”, higher US interest rates and supply chain issues
• UK supermarket Sainsbury’s announced plans to cut 3,000 jobs, primarily through closing its cafes and food counters 
• The UK government agreed a £9bn deal with Rolls-Royce to design, build and maintain nuclear reactors that power the Royal Navy’s submarines
• Netflix said it will raise subscription prices in the US following a record number of new subscribers in the fourth quarter last year

Global and political developments

• Mr Trump has signed over 30 executive orders so far, including directing the US to withdraw from the Paris Climate Agreement and World Health Organisation, and ending federal government’s diversity, equity and inclusion programmes
• Mr Trump threatened further US sanctions against Russia unless it ended the war with Ukraine 
• Mr Trump called for OPEC countries to help lower the price of oil, saying that it would help end the war in Ukraine 
• Elon Musk said it would be harder to donate to the Reform UK party following his new position as head of the Department of Government efficiency, the FT reports
• The CIA has concluded with “low confidence” that COVID-19 probably began as a leak from a laboratory in China in a change from its previous position that there was insufficient information to reach a conclusion
• The EU Commission is considering rule changes to allow governments to exclude foreign bidders and “buy European”
• Houthi rebels said they would limit attacks on commercial ships sailing through the Red Sea following the Israel-Hamas ceasefire
• UK defence minister John Healey said the Royal Navy tracked a Russian spy ship sailing near undersea infrastructure in UK waters
• UK health secretary Wes Streeting said that work to build or expand 40 UK hospitals will be delayed by at least a decade
• Marcus Bokkerink was removed as chair of the UK CMA following the government’s assessment that the watchdog was not sufficiently focused on growth, the FT reports

And finally… the Minor Planet Centre at the Harvard Smithsonian Centre for Astrophysics has removed a recently discovered asteroid from its inventory because it was found to be Elon Musk’s Tesla Roadster mounted to a SpaceX rocket that was launched in 2018 – aster-void