«The age of disorder» is coming: the main points on the Deutsche Bank world economy report

Today’s article isn’t about fintech. I read a recent Deutsche Bank research called “The age of disorder” and brought out the main issues. The global research of the world economy and long-term factors influencing it provides an understanding of what will really matter and how the world will change during the next decade. And the roots of main problems are the key to understanding the coming changes.

The USA and China relations

One of the biggest issues of the era is likely to be the US/China relations, or their deterioration. China could overtake the United States as the world’s largest economy, with economic tension rising as that moment approaches. For at least the past 20 years, the global geopolitical structure has been relatively simple. The three key political blocs were the United States, China and the EU. This allocation is likely to develop into a bipolar confrontation over the next decade, as both the US and China will seek to prevent each other from achieving dominance. The Covid-19 pandemic will accelerate this process. The virus is being used by both countries as a political wedge and will be a central subject in the upcoming US elections. This situation is somewhat similar to the Cold War, but China is much more significantly integrated into the world economy than the USSR once was.

At the beginning of the trade conflict between the United States and China, European and other countries tried to remain neutral. It will likely be difficult, if not impossible, to remain neutral during the coming decade. The Association of Southeast Asian Nations will side with China due to sheer weight of economic dependence. Japan, South Korea and Australia will likely be in the US camp. The EU is likely to take gradually the part of the US in its containment strategy and technological advancement. Ultimately, trade and policy disagreements can be fixed by the parties. However, technology is a far more difficult issue. With the development of artificial intelligence (AI), its importance becomes obvious — in this direction, none of the parties will change their positions. The results of the US elections in November are unlikely to change the sequence of events.

Inflation or deflation?

What the future holds for us — inflation or deflation? Opinions are widely divided and a return to low stable inflation seems unlikely in the near future. At the same time, whatever the scenario, the economic instability will affect everyone. The research team believes that inflation is the more probable future, and I agree with it. But the reality is that deflationary trends can easily win out.

Inflation can be ignited by a permanent shift in the policy stance. Covid-19 events have led to extraordinary policy changes. The inflation rate may rise due to the enormous borrowing programmes and after the easing of supply constraints induced by the pandemic. Also, the deterioration of the US/China relations and the intensification of the trade war bring about the rise of headline inflation in the USA. As globalisation trends reverse and people are focused on the pandemic, it is likely the world will move towards a more local supply chain environment. Prices are likely to rise over previous years.

In general, it will be much more difficult for authorities to control inflation at the same level due to the pandemic. The authors of the study believe that the disinflation impact is obvious, especially in the short term. However, inflation will dominate as the decade progresses and be significantly away from the target. Moreover, both outcomes will bring disorder compared to the stability of the globalisation era.

Economists, environmentalists and the issue of climate change

On this issue, the world has split into two blocs — those who focus on economic development and those who fight for the environment preservation, that creates misunderstanding and conflict. Opinions are particularly polarised by age — unlike adults and older generations, young people are actively advocating for environment protection and caring for the Earth. 2020 showed us that the world can change and adapt to such changes much faster than anyone expected. Greenpeace sees the pandemic as a catalyst rather than an obstacle to climate change. Accordingly, other organizations, political parties, large companies will support this initiative — the Paris Accord has gone forward with this issue.

Many environmentalists see the virus as the greatest opportunity to change the present-day situation. They acknowledge that the lockdowns were hard times, but point out that less than a year into the pandemic, we are already learning how to be more environmentally-friendly. The environmentalists feel differently about economic consequences. They recognize their negative nature, but perceive them as a necessary sacrifice in establishing a healthier environment.

Those who prioritise the economy are actively advocating the importance of economic growth. The 26% cut in emissions equals a more than 11% rise in US unemployment rate since February. The social consequences of this level of unemployment are very serious. Economists note that governments and central banks have embarked on borrowing programmes with little indication of how the debt will be repaired. And how can debt be sustained if the economy isn’t the top priority?

Both sides stand their ground. The debates and the choice of the main course of development will extend to the coming decade.

The world is now undergoing significant changes. Not only countries, regulation, ecosystems are changing, but the whole world order. All this will affect the financial system, which is already reacting: extreme transition to online, further development of seamless payment process, biometrics and contactless payment methods. The phrase “adapt to or die” has never been more relevant in the payments industry — and with the difficulties, the “era of disorder” will surely lead us out of the crisis.