From UBS, the new world that awaits us

Change: this is the word probably uttered most frequently during the UBS meeting which put the macro trends expected for 2024 at the center of the reflection. As underlined, in fact Luca Pedrotti introducing the work «over the last few years the world has experienced rapid transformations which have simultaneously upset the economy and finance, politics and international balances, but also aspects which have a direct impact on daily life, such as the overwhelming burst of artificial intelligence. Hence the difficulty of outlining future scenarios with certainty, but also the need to identify trend lines that can help direct the choices of businesses and consumers in the coming years and which will significantly influence economic growth".

«A first element that needs to be evaluated – he underlined Matthew Ramenghi – consists in the fact that during 2023 the US economy performed better than analysts had predicted. There was therefore no feared recession, but this positive trend seems destined to slow down in the coming months, in the face of growing pressure on consumers. In any case, inflation is falling and in some situations we can even speak of deflation. European expansion is also expected to remain weak, if not even stagnate, even if inflation has significantly decreased; while China could enter a phase of "new normality", characterized by smaller but potentially higher quality growth".

Looking therefore to the immediate future, UBS analysts predict a soft landing for the US economy and a slowdown in the GDP prospects of both the euro zone (+0,6% for 2024) and Switzerland (+0,8% in 2023 and +0,6% in 2024). In this context, Elena Wilhelmin has focused its attention on inflation, «now below the target threshold of 2% in Switzerland and rapidly approaching also in the euro area and which should weaken further also due to the ongoing slowdown, so much so that central banks could begin to cut the cost of money. Specifically, the Swiss National Bank should cut its key rates in the face of more modest levels of growth and inflation, but this should not have repercussions on the yields of bonds (public and private) which after many years have returned to being a interesting investment asset. In the case of the Swiss production system, the difficulties linked to the exchange rate are felt particularly by companies that turn to foreign markets".

«The market's attention – continued Elena Guglielmin – therefore seems to focus above all on the ways and times with which the Federal Reserve, and subsequently the Bank of England, could begin to cut the cost of money. The ECB is expected to follow with a cut in June. These decisions could give a boost to bonds which have returned after many years to being an interesting investment asset again."

Broadening our gaze in order to see the scenarios that will presumably impose themselves more and more clearly in the coming months, Matteo Ramenghi underlined how «relations between the United States and China are at historic lows and potential blocks on Chinese imports and investments weigh on the Beijing's growth prospects. Last year too, the Chinese stock market underperformed global stock markets by more than 10 percentage points and the cause was to be found in the economic data that turned out to be below expectations and the geopolitical situation. In fact, there are conflicting signals on the relationship between the United States and China, and some progress on the diplomatic level has been followed by trade restrictions and less than conciliatory declarations. Very significantly, Mexico has replaced China as the United States' largest trading partner since the beginning of the year. Additionally, the US Treasury Department has proposed a mechanism to screen private sector overseas investments in advanced military technologies and cybersecurity in defined countries of concern, that is, worrying. These included China and its special status regions, Hong Kong and Macao. This is not a block tout court but essentially a right of veto over some foreign investments. The result will likely be to further limit capital flows to China to slow the development of advanced technologies that could pose a threat to the United States. Most of the advanced economies of Western countries are looking at similar strategies with interest, in a sector of particular relevance from an energy transition perspective, think for example of the case of the production of batteries for electric motors".

Between the other challenges in the coming years, UBS analysts undoubtedly identify those of demography, digitalisation, but also of the energy transition and public debt management policies. Demography represents perhaps the greatest threat: the most advanced economies in the world - such as Japan and several European countries (including Germany and Italy), and in the future China - are grappling with a declining and aging population. This is likely to have a negative impact on consumption and workforce availability, with the share of pensioners in the working population having already increased from 12 to 15% globally over the last decade. «In this sense – explains Ramenghi – digitalisation could come in handy, replacing the missing workforce with artificial intelligence: according to some studies, AI could lead to an increase in productivity between 2 and 7%».

In the background remains the energy transition, necessary to combat an increasingly pressing climate emergency. Even if the demand for oil will continue to increase for years, the expert reflects, investments (public and private) in renewable energy, batteries and the development of new technologies will continue. «What all these challenges have in common – concluded Matteo Ramenghi – is the need for strong investments to be able to face them: precisely to cope with these transformations, therefore, it is likely that public debts will rise in the coming years. The best way to manage debt is to be able to count on robust growth, also driven by investments; but, if this were not the case, it would be necessary to think about increased taxation, sovereign defaults and financial repression, to keep public debt yields below inflation."