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The 3D Reset: deglobalisation

Deglobalisation is one of the “3Ds” we see as shaping a new economic regime characterised by higher inflation. We explain how.

01/07/2023
Regime shift series

Authors

Simon Keane
Investment specialist

As the benefits of globalisation diminish, the outcome is likely to be more inflation. Here’s how.

Geopolitical developments, most recently Russia’s invasion of Ukraine, may mark an important turning point in the road. It seems the global economy is on a journey back to a time when the old inflationary foe was always lurking just out of sight.

That period pre-dates what central bankers have termed the Non-Inflationary Consistently Expansionary, or “NICE” era.

The NICE era began in the 1990s. One of its main drivers was the globalisation process, which was rapidly accelerating at the time and helping the world to move on from the inflation prone 1970s and 1980s.

Globalisation, however, is no longer in full flight. As a result it might not be able to provide the same benefits it did during the near three-decade period of relative calm and prosperity of NICE era.

The changing nature of globalisation, and the risk of deglobalisation, appears to be one important element of the shift in the economic regime underway.

Next period may not be so NICE

Problematic re-openings following the initial Covid-19 pandemic lockdowns of 2020/21 gave us the first inklings of a possible break in economic regime.

Images of container ships unable to leave port in Asia -  some of them carrying vital PPE equipment for the fight against Covid-19 in the West – were a window on what might happen.

They showed what could occur should the globalised model of extended supply chains – and the existing world economic order – be seriously threatened.

The ensuing period of intense goods price inflation contrasted vividly with the previous three decades when globalisation had contributed to a long-term decline in goods prices.

Central bankers initially believed inflation would subside by itself. It became apparent, however, the world had moved into a more permanent state of supply shortages and more frequent price increases and a new economic regime.

While the globalisation “dividend” had started to wane some time ago, geopolitical tensions – most recently following Russia’s invasion of Ukraine – are challenging multi-national companies (MNCs) reliant on global value chains

It appears the dividend enjoyed during the NICE period can no longer be counted on to the same extent.

David Rees, senior emerging markets economist, says:

“The new world order will be negative for the global economy. The reorganisation of global value chains, energy transition and higher military spending will be expensive. Meanwhile, less efficient supply chains will also raise costs and inflation.”

Rising risk of economic decoupling

Since the Ukraine war we’ve seen how countries which might previously have sided with the US rather than China take a more neutral stance in geopolitical events. These developments have added to the risks of a decoupling in the world’s two largest economies.

And in some cases it is prompting MNCs in the West to consider reshoring, or nearshoring overseas production as well as redirecting investment into “friendly” lower risk countries, so-called friendshoring.

These trends are another threat to a world economic order already tested by Brexit, tariffs left over from the trade wars of the Trump presidency (added to by Biden) and the pandemic.

They will ultimately be inflationary if concerns over supply chain resilience and reliability rather than economic efficiency alone come to drive future decision making in a new economic regime.

For a description on highlighted words see: The 3D Reset: the economic terms you’ll need to know

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Authors

Simon Keane
Investment specialist

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