There are three key trends currently reshaping our economies and societies: deglobalization, decarbonization, and demographics—the “3Ds.” And as they begin to usher in a new world order, the 3Ds will likely have lasting implications for investors that will continue to shake out in the coming years.
After years of low inflation and zero interest rates, this regime shift may feel like something totally new in the markets, but in many ways it’s a reset to how things were just a few decades ago. This “reset” brings new challenges, but for active investors it also brings opportunity.
Investors should expect higher inflation and tighter economic policy for longer. In the near term, central banks may have done enough to lower inflation from the peaks we saw last year—when US inflation hit a 40-year high—but there’s been a drastic change in the trade-off between growth and inflation.
Following the Global Financial Crisis, central banks stepped in to support the real economy and markets at the first sign of each downturn. Interest rates were cut to record lows, and trillions of dollars’ worth of quantitative easing were all seen as necessary to fight the risk of deflation. Now, amid rising political pressures, central banks are actively trying to slow growth to lower inflation—even if that triggers recession.
Inflationary pressures brought about by the 3Ds could result in tighter and more restrictive monetary policy than before the COVID-19 pandemic if central banks are to meet their obligations to maintain price stability.
The 3Ds of the Reset
Taken together, the 3Ds are reshaping the investment landscape. Understanding these trends, how they affect the global economy, and what that means for market volatility, could help investors decipher what may be coming next and where new opportunities could arise.
Demographics: Ongoing worker shortages could push labor costs higher. Since the pandemic began, the labor-force participation rate has fallen in both the US and in other economies, such as the UK. In December 2022, there were 11 million job vacancies in the US, and only 5.7 million unemployed people. Basic economics dictates that where demand exceeds supply, prices, or in this case wages, must rise.
Deglobalization: Deglobalization is also adding to long-term inflationary pressures. The already strained relationship between the West and China intensified during the pandemic, as widespread blockages in the Chinese supply chain exacerbated inflation and highlighted the over-reliance on imports. The Russia-Ukraine war exposed similar dependencies, particularly regarding energy and agriculture in Europe.