Three mega-forces seem set to dominate the investment landscape for the next decade or longer, with major implications for the macro regime and portfolio design.
Each of these far-reaching forces—climate change, demographics and deglobalization—is significant in its own right. Where they’re likely to interact in a directionally similar way, they have the power to reshape financial outcomes, creating a new world for investors to navigate.
Macro Mega-Forces and the Impact on Economic Growth
Generally speaking, we think that one key implication of these mega-forces is a lower baseline level of economic growth. Here’s a brief overview of each force and how it could play into growth prospects.
Demographics: The global population of working-age people has peaked and is set to decline in coming decades. Boosting labor participation could help counter the decline, but a relatively small share of workers are in scope for extended careers, and efforts to raise retirement ages have been controversial.
Also, a growing need for long-term care could impair productivity by crowding out research and development or infrastructure spending while requiring a growing share of people engaged in the care sector, which doesn’t contribute to measurable growth. Artificial intelligence (AI) has the potential to boost productivity, which could help offset demographics.
Climate Change: The growth effect of climate change may be the hardest force to assess, given the diverse variables from rising temperatures to migration pressure and resource conflict. Focusing here on rising temperatures alone, accumulated research implies that this would likely depress growth, though with a very uneven impact across regions and countries—and a materially worse outcome for poor countries.
Could the response to climate change help growth too? One possible avenue is investment in the energy transition, including a sizable amount of government spending that could offset some extent of negative growth forces. However, research suggests that this impact would likely be smaller than some of the downward forces—and subject to sustained capital expenditures globally.
Deglobalization: The retreat of the long era of globalization will likely continue. There’s general dissatisfaction with globalization in the internal politics of developed economies, and relations between the US and China—two major global players—are hardening. This will likely push down on growth rates and corporate margins.
Deglobalization can affect growth through declining trade, a fragmenting of the global labor force and reduced capital mobility, along with possible secondary forces such as political instability and geopolitical conflict. Deglobalization would likely be tempered by a partial partitioning of countries into trade blocs, but overall it dampens the growth outlook.
We’re often asked whether the onset of AI could improve productivity enough to offset these macro forces. It might, but the impact would have to be at the top of the range of historical improvements under economic regimes. So, building in such expectations would take a significant step.
