Going global – and back again

Thinking Aloud

Every year has its upsets, but 2016 seems to have thrown up more than most. With the Brexit referendum, with the election of US President Trump, and with the continued rise of insurgent populist movements elsewhere in the developed world, it feels as though we are heading for an economic and political crunch point. As this momentous year draws to a close, what has led us to this point, and where do we go next?

Globalisation of trade, labour and capital has led to tangible benefits for most people in most countries. World trade expanded eight-fold over the past 35 years, as China, India and the former communist countries entered the global trading system. The size of the global workforce has effectively doubled since the early 1990s. And global capital flows increased more than 25-fold from 1980 to 2007. In the World Bank’s view, the bringing together of trade, migration, capital flows and technology has helped halve the share of the global population living in extreme poverty.

As for the developed world, the more efficient allocation of capital, gains in productivity and lower consumer prices brought about by globalisation have helped to lift living standards. Trade globalisation has broadly doubled the real incomes of typical households, and has raised real incomes for the poorest by over 150%. Champions of globalisation have also argued that it has created millions of new, higher-wage jobs – with US workers in export-intensive industries benefiting from a ‘premium’ of as much as 15% over other industries, and one in seven EU jobs dependent on exports to the rest of the world.

If the gains (from globalisation) are real, they have not been evenly spread.

But if the gains are real, they have not been evenly spread. For lower-skilled workers, downward pressure on wages, rather than pay premiums, has been the order of the day as labour has become more globalised. These effects have also been concentrated in some local markets, resulting in deep, long-lasting negative effects. Furthermore, while the globalisation of capital has underpinned investment, particularly in the emerging markets, it has also opened the door to financial contagion and concerns about the stability of financial systems – as played out most recently in the global financial crisis (GFC). And many countries have experienced growing inequality in wealth, income and opportunity as post-GFC exceptional monetary policies have boosted asset values and wealth, while fiscal austerity been introduced to ease public debt burdens.

The UK is a case in point. The post-GFC recovery certainly looks decent on paper, with GDP more than 15% above its 2009 trough and 8% higher than its pre-crisis peak. The recovery in national income is more nuanced, however, with GDP per head (a more meaningful measure of individual wellbeing, since it takes into account population growth) rising by a little over 1%. Looking at median rather than mean household incomes, half of all UK households have seen no material recovery in incomes since 2005, once the effects of inflation and tax changes have been stripped out. And although more than 2.5 million new jobs have been created since 2010, workers have experienced their longest period of flat or falling real wages since at least the mid-19th Century. At the same time, the wealth of the bottom 20% of the income distribution has fallen since 2010, while that of the top quintile has risen by 20% in the same period.

UK wage growth has been below 2% for much of the last five years

UK Wages

This year’s electoral tests have brought de-globalisation and protectionist tendencies into the front line of government in the US and UK. Incumbent governments facing such challenges in the year ahead – in France and Germany, most obviously – are contemplating how to explain the benefits of globalisation, while acknowledging they could and should be shared more widely.

Why is this important for investors? First, anticipated moves towards increased use of fiscal policy in the United States after nearly a decade of exceptional monetary policy are already having a significant impact on both equity and bond markets. Second, direct support for lower-skilled workers could point to a pick-up in investment in education and training, while steps to facilitate access to opportunity could benefit the healthcare and infrastructure sectors. Finally, if governments fail to provide convincing answers – or if those newly elected on the basis of apparently simple slogans and solutions fail to live up to their promises – the next wave of ‘de-globalisation’ could be an even more powerful one than that of 2016.

As we contemplate this prospect, it is worth bearing in mind that the ‘story’ of populism and de-globalisation is a nuanced one – with both negative and positive implications for champions of globalisation. On the negative side, this complexity may make it harder to address successfully the causes of discontent and reduce the risk of damaging de-globalisation. On the positive side, protectionism is not an inevitable, reflexive response to the challenges of the post-GFC world. Returning to the UK, and specifically the EU referendum result, young people voted Remain overall, whereas older age groups favoured Leave.

And yet the Bank of England’s analysis of income and wealth trends shows that the young have been hugely disadvantaged relative to the old in the years that have followed the GFC. Since 2007, the nominal earnings of the under 30s have risen by 6%, compared with a rise of 22% for the over 30s. At the same time, all the rise in wealth since 2007 has effectively gone to the over 45s, with two-thirds accumulating to the over 65s. In contrast, the 16-34 age group has experienced a 10% fall in wealth over the same period. Those who have spent all their lives in a globalised world appear most reluctant to give up on it just yet.

 


The above article by Lucy O’Carroll, Chief Economist, Investment Solutions at Aberdeen Asset Managers Limited, originally appeared on the Aberdeen Assest Management ‘Thinking Aloud’ blog on 30th November 2016