By Chris Dorrell
The global economy has entered a “new regime” as a series of major changes transform the global economy, Blackrock’s global chief investment strategist said.
Speaking at TheCityUK’s international conference, Wei Li said “the times have completely changed and we need a new playbook.”
Li suggested the global economy is being affected by a series of structural changes that were fundamentally reshaping the conditions that held during ‘the great moderation’, a 40-year period of relatively low inflation.
The ‘great moderation’ was characterised, among other things, by a “peace dividend” and the entry of China into the global market, Li suggested.
But a series of structural changes, such as the transition to net zero, growing geopolitical fragmentation and demographic changes, mean a new sort of forces drive the global economy.
“We’ve gone from a world shaped by demand to a world shaped by supply,” Li said
In the ‘great moderation’ there were “multi-decade bull markets” where it “didn’t matter if you invested in equities or bonds, or whether your portfolio was split 60-40, 80-20 (between equities and bonds). Everything was going up.” That is no longer true, Li argued.
The new pressures will make life more difficult for central banks in future because interest rates are less effective at taming inflationary pressures caused by supply-side issues.
Li doubted whether the Fed will be able to cut rates this year, as markets expect, and suggested “recession is unavoidable” in the US.
Higher-for-longer rates will bring “financial cracks” as happened in the gilt market last Autumn and with the collapse of Silicon Valley Bank. “Its hard to say what the next crack will be but its reasonable to expect that there’ll be more,” she said.
Li’s warnings echo a cautionary message from Larry Fink issued in March. In his annual letter to investors, Fink said that there would be a “slow rolling crisis” with “more seizures and shutdowns coming”.
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