Société Générale: A New World Order – When demand overtakes supply

“The global economy is in a process of dramatic change. This is not merely due to the increasing influence that the emerging countries have on the international stage, but because the model of the last few decades came to a definitive end as a result of the 2008 financial crisis. Thus, everything, or nearly everything, that has come to characterise the last few decades now needs to be reconsidered. But, what characteristics will define the next era?

Very few past models are still valid. Such a situation has contributed to the extreme uncertainty that currently prevails and it will probably take a certain amount of time to establish with any degree of confidence the economic and financial laws of this next world order. By stepping away from the short term, a certain number of pointers allow us to navigate through this imbroglio, to find some consistency in the period we are going through and to identify the key points that will enable us to understand the long-term issues and to establish what sort of environment these issues imply for the main asset classes. As a result of this analysis, we have made one key observation: the last long cycle, which extended from the middle of the 1980s to the middle of the 2000s, was shaped by an environment that strongly favoured the development of supply; the next era will in all likelihood be dictated by demand issues. Such an abrupt change in the balance of the fundamental economic forces calls for a full redefinition of the economic and financial rules that have been in force since the mid- 1980s. Given the extreme nature of these developments, the transition towards a new regime can be nothing but chaotic and relatively long-winded, but ultimately it will replace the established order….

While the first phase of development in the emerging markets was above all characterised by an enormous boom in production capacities on a global scale with a correlating increase in competition from all sides, as well as a long period of disinflation and low interest rates, in the next phase, the influence of the emerging world will manifest itself as an explosion in demand and a resurgence of resource shortages. It is now impossible to ignore questions over the sustainability of the current trends. Resources of all kinds are in short supply and the collateral damage projected for the not too distant future is rapidly growing: atmospheric pollution, climate change, health risks, public turmoil, etc. That the forthcoming economic development may not be sustainable over the long term does not mean that the movement won’t continue. The underlying structural trends are powerful and they will therefore continue to govern the course of events until their effects ultimately change the situation. It is difficult to say how long the first phase will last. Current projections suggest resource shortages might not really start to bite for 10 or 15 years. This means that the first leg of the long cycle could run until 2025, which is just when widespread population aging should start to have an impact in the emerging countries which could in turn induce a certain number of changes.

These changes have already altered the balance in many areas, by creating a context that has favoured significant shifts in the relative prices of manufactured goods versus services, and commodities versus goods, trends which are ultimately likely to dictate general price levels. However, this is just a beginning – we believe that as these changes play out they will bring new characteristics to the world that are in many ways diametrically opposed to those of the past.”

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