The 2020s are set to be an economic turning point, says global banking giant

Updated 13 Nov 2019, 7:09am

The 2020s are set to be a decade of dramatic economic and social upheaval, reversing many of the trends of the past 40 years, according to one of the world's largest banks.

In what it describes as "the decade of peak", Bank of America Merrill Lynch (BAML) analysts say a range of economic and social challenges are "all heading to a boiling point" next decade.

"We enter the next decade with interest rates at 5,000-year lows, the largest asset bubble in history, a planet that is heating up, and a deflationary profile of debt, disruption and demographics," the report warns.

"We will end it with nearly 1 billion people added to the world, a rapidly ageing population, up to 800 million people facing the threat of job automation and the environment on the brink of catastrophic change."

As these problems mount, the bank's investment strategists say many long-established trends will peak, before reversing.
It is forecasting peak globalisation, as governments seek to reassert sovereignty over trade and investment flows across borders, as already emerging through Donald Trump's trade war with China, the dispute between Korea and Japan and the rise of nationalist politicians in many countries.

"The 1981-2016 era of unchecked flow of goods, people and capital is coming to an end, catalysed by the widespread recognition that while globalisation has meant lower consumer prices, it has also meant slower growth, precarious employment and social disruption," BAML's analysts write.

They note that global trade growth has fallen below world economic growth for only the second time since the global financial crisis and sixth time since 1980.

They expect the trend away from globalisation to strengthen next decade.
"Countries will develop explicit national industrial policies and boost spending on R&D [research and development] to foster local innovation, protect nascent industries, and shield national champions from hostile foreign takeovers," the report predicts.

Meanwhile, the bank also argues that increasingly automated factories will reduce the advantages of manufacturing in low-wage developing countries and see more production return to the country of consumption.

"Advanced industrial automation can enable local production, unintentionally playing into rising nationalism and trade protectionism themes but also helping to reduce environmental footprint," the report forecasts.

Trade war to spread to 'splinternet'
BAML argues the trend away from globalisation is already happening in technology, with a technological "arms race" between the US and China and the potential for a "splinternet".
"Our global technology team believes that the Huawei incident has solidified China's resolve and accelerated the process of reducing the reliance on US vendors," they write.

"China's strategy is to ensure that 40 per cent of its mobile phone chips, 70 per cent of its industrial robots and 80 per cent of its renewable energy equipment is 'Made in China' by 2025. This China First strategy will be met head-on by an America First strategy."

With globalisation and access to cheap labour forces in developing countries having been a key driver of lower consumer price rises over the past few decades, BAML warns the shift back towards localism will have big financial consequences.

"The 2020s will likely mean higher [economic] growth, higher inflation, higher interest rates, and outperformance by global equities and commodities versus bonds," the analysts tip.

Bond bubble to burst
After three decades of falling inflation and generally declining interest rates in developed economies, BAML says the negative consequences of ultra-low rates become harder to ignore.
"We already see evidence of 'quantitative failure' in Europe and Japan," the analysts argue.

BAML says the key reason for this is that there is a surplus of global savings and lack of both demand and investment, as low rates pushed up asset prices, favouring the wealthy.
"The monetary policy largess of the 2010s induced significant upside (and polarisation) in asset prices, but the economic spoils went to holders of capital not workers," it notes.
"A portfolio of bonds and stocks rose from $US100 to $US223, while $US100 of wages rose to $US125."


 Photo: Global interest rates remain around the lowest levels they have been in 5,000 years. (Supplied: BAML)

However, BAML's analysts believe the era of "5,000-year low" interest rates will come to an end within the next decade.
"In the coming years a policy mistake (inflation targeting/MMT) and/or the start of policy impotence (central banks pushing on a string) will likely cause a jump in interest rate volatility, end the decade-long bullish combo of minimum rates-maximum profits, and signal the big top in asset prices."

MMT, or Modern Monetary Theory, is a stream of economics increasing in popularity that argues a government is unrestrained in how much it spends in its own currency as its central bank can always print more, provided that it does not spend so much that inflation gets out of control.

A growing number of analysts are drawing on MMT, or similar theories, to argue that future responses to economic weakness should involve greater government spending, rather than lower interest rates or central bank injections into the banking system.

If inflation and interest rates do start rising next decade, BAML warns that could catch out many investors, including superannuation funds, that have parked money in long-term government or corporate bonds at very low interest rates, including around $US13 trillion of debt paying negative interest rates.


Passing 'peak inequality' and 'peak youth'
BAML is also tipping peak wealth inequality, as maximising profits gives way to a new era of "moral capitalism", where companies are increasingly forced to take account of other stakeholders beyond their shareholders.

As an example, the analysts argue the 2020 US presidential election is likely to be a battle between protectionist Republicans against redistributionist Democrats.
"Policy actions will almost certainly involve higher US taxes in the 2020s; Occupy Silicon Valley policies to target tech profits, regulation of stock buybacks and a combination of rental price controls, living wages, and student debt forgiveness financed by wealth taxation," they predict.

"If necessary, governments are likely to issue debt (MMT) until inflation rises with infrastructure spending the big beneficiary."
Bank of America also says the world will hit "peak youth" as, for the first time in human history, there will be more seniors aged over 65 on the planet than children aged under five.

 Photo: The world is now at a tipping point where over-65s start outnumbering under-fives. (Supplied: BAML)

This trend will only accelerate beyond the 2020s.
"By 2100, the UN expects the number of under-fives to remain flat at 650 million, but those aged 65+ to reach 2.5 billion," notes BAML.
This is the greatest counter to a shift in inflation trends, as older people tend to save more, with the growing supply of savings putting downward pressure on interest rates.

Enough stuff as environmental concerns take over
BAML is also predicting that the world will finally hit "peak oil" — but not in the way most analysts had previously predicted, which is that production would hit a maximum and drop off. Instead, the bank expects oil demand to hit a peak next decade and start falling away.

That is connected with another predicted peak for cars, specifically those running with internal combustion engines, as electric vehicles rapidly gain in popularity.

 Photo: The number of electric vehicles is predicted to surge next decade, leading oil demand to fall. (Supplied: BAML)

These trends are being driven largely by the increasingly pressing threat of climate change, according to BAML.
"Accelerating global warming means the past four years have been the hottest ever recorded and the 20 warmest years occurred over the past 22 years," the bank's analysts report.

 Photo: The world's 20 warmest years in modern recorded history have occurred over the past 22 years. (Supplied: NOAA)

"Climate Action could be one of the biggest transformations to the global economic landscape, impacting current practices in multiple areas, such as energy, farming, transport and even globalisation (local production can be much more environmentally friendly, for example).

"Bold climate action could yield a direct economic gain of $US26 trillion through to 2030 compared with business as usual."
In some further bad news for retailers, the analysts are also tipping "peak stuff", as "conspicuous consumption" ends in developed economies and the sharing and circular economies become more popular.