EMR July 2023
Dear Reader,
A detailed and specific assessment of the current global economic environment remains a major challenge, especially given the difficulties of reliable forecasting, which still has to rely on lagged data sets. In this context, two causes are particularly instructive. The first concerns visible anti-Americanism versus growing support for China and Russia, in particular. This can be explained by the specific commitments of various governments and also by the systematic support in favor of global corporations. In other words, there is a clear trend toward a left-wing political positioning that is in opposition to the democratic economic concept of free trade. The second reason also argues for the end of a politically conditioned focus on cheap imports. Considerations in this regard are clearly to be found in the reversal of the world situation that has taken place since the end of the Second World War.
A concrete assessment of the near future remains a cause for great concern. The main arguments for our rather pessimistic view of the current situation are to be seen as consequences of the financial crisis of 2008-2009 and the Covid 19 pandemic, which highlighted the fragility of supply chains. These developments persist in being mainly politically motivated and not so much to do with economic constraints. In addition, fears of recession were and are seen as a consequence of the Russian military’s invasion of Ukraine. The Russian invasion of Ukraine has shown everyone, how vulnerable the risk of overdependence on undemocratic regimes is. These developments call for a new industrial strategy, especially in the area of technological economic innovation. This setting is due in particular to the relative commitments and systematic support of the respective governments for globally active companies. In other words, there is a visible and discernible trend toward a left-wing political stance as opposed to a democratic, free-trade approach to entrepreneurship.
From the current overview it can be deduced that a new industrial structure is required, taking into account geopolitical needs and requirements. The promotion or punishment of companies should not be the task of politicians, as is implicitly the case in “dirigiste” states. In general, and especially in the area of “private enterprise”, which is of particular interest to us, the transfer of sensitive technologies to countries with hostile regimes such as Russia and China should no longer be so strongly encouraged.
THE CURRENT FRAMEWORK
The originally internal slogan from the 1992 Clinton campaign sums it up: “It’s the economy, stupid”. While the focus is increasingly on a modern and innovative industrial strategy, repatriation is currently a very hot topic. It is about maintaining and expanding domestic production lines, especially in the field of new technologies, in harmony with nature and the environment. Therefore, what is necessary and required, is a shift from public to private investment, i.e., a de facto “repatriation” of the production of strategic goods and services.
Focusing on economic growth is no longer sufficient. Rather, it is imperative to focus dynamically and continuously on the core areas of the economy. This assumption speaks of a trend reversal towards a newer innovation capability. Another feature implicitly calling for a trend reversal, points to the significant economic impact of the failure of “economic integration and cooperation” in the free world. This due to the fact that it has not made countries more peaceful and cooperative. In this context, we again find two relevant explanations. Primarily, European anti-Americanism, and secondly, China’s policy of continuing to subsidize various aspects of the economy, without ever considering the impact on other nations. This behavior is called “erosion of competitiveness” and is usually a determining factor in specific sectors of the economy. These tendencies are particularly evident in the Russian invasion of Ukraine.
Another aspect that ought not be underestimated concerns the rise of individually feared, politically motivated interdependencies in supply chains not only for semiconductors but increasingly also for medical devices; all interdependencies that might be useful for geopolitical domination, including the mastering of inequality. The interdependencies we have witnessed in the recent past are not very helpful in drawing concrete conclusions about the future course of economic activity and, by extension, profitable investment policies.
INVESTMENT APPROACH
Even if the above-mentioned difficulties are not exhaustively listed, it is necessary, in due time, to review the criteria for future developments of economic activity, as they may concern, among others:
- the policy of regressive tax cuts,
- the reduction of public investment,
- the reorganization of corporate focus,
- the possible reversal of corporate concentration and
- the management of domestic and foreign interest rates.
IMPLICATIONS FOR INVESTMENT POLICY
If our analysis of the current situation is accurate and credible, then the near future may be characterized by a much stronger sectoral bias than has been the case in the recent past; with an emphasis on country selection. Therefore, it is not a “domestic bias” versus a “foreign bias” but a “sectoral bias” that should be the determinant and motivating factor. A promising investment policy should therefore focus more on selecting the most prospective sectors of the economy. This approach could be called “crowding out public investment.” In other words, the future focus should be primarily on private investment, even though we may have to deal with widespread anti-entrepreneurial attitudes in the media.
Comments are welcome.
