5 PREDICTIONS FOR COMING ECONOMIC SHIFTS
By: J Scott

For anyone paying close attention to the economy these days, there are a few recurring and persistent themes. No surprisingly, Covid has changed the course of global economies; equally as important to us is that Covid has changed American perspectives, outlooks and behaviors.

For those who don’t follow the economy as closely, I wanted to document some of the coming shifts I see and make some predictions about how they are likely to change the economic landscape for years – or decades – to come.

Prediction #1: Increase in Equity & Economic Volatility

While I haven’t seen much written about this, as someone who operates in the private equity space, there’s a pattern I’ve started to see. Essentially, with so much money flowing through the system, and with much of it concentrated in the hands of high-net worth individuals (including investors), we’re starting to see a shift from investments being funded with debt to being funded with equity.

This includes things like large real estate projects, startup businesses, and business expansions. The rise in interest rates is driving this as well. Those looking for funding for their businesses and projects are often turning to equity investors instead of debt because that equity is getting cheaper while debt is getting more expensive. And, because those equity investors tend to be less sophisticated than their debt counterparts (banks, institutional lenders, etc.), in many cases, it’s faster and easier to raise equity than debt.

While there is nothing inherently bad about this, there are some likely ramifications. Equity investors tend to take more risks. Equity investors tend to get spooked a lot more easily. And equity investors tend to think shorter-term.

All of these things lead to volatility. Money flowing into and out of investments quickly, leaving the success of projects to the whims of irrational investors chasing easy profits. And has the economy slips into recession, these easy profits become harder and harder to find, leading to more volatility.

Prediction #2: Globalization Will Shrink

For the past 40 years, it’s felt as if globalization – economies working together on an international scale – was inevitable. And things have certainly moved in that direction.

But, thanks to Covid, that’s starting to change.

Supply chain shortages and global instability have been a good reminder that we can’t always rely on the manufacturing output of other nations, the ability to get goods from there to here, or even the willingness of other countries to provide what we need. Everything from energy to food to computer chips has been more scarce since Covid, and that’s starting to change domestic policy and production.

We’re already starting to see a push for increased energy production in the US, and domestic manufacturing is starting to ramp up for the first time since the 1970s. While globalization is great for the worldwide economy, it comes with risks, and a healthy balance of relying on others while remaining self-sufficient is likely the key to long-term economic growth.

Prediction #3: Inflationary Pressures Will Remain

While a move from globalization to domestic manufacturing will help reduce risk and supply chain pressures, there is a downside. It currently costs more to manufacture most commodities in the US than it does to produce them elsewhere. These extra costs will be passed on to consumers, creating inflationary pressure across many industries and sectors where prices have been dropping over the past several decades.

Electronics are likely to cost more. Food is likely to cost more. Energy is likely to cost more.

These pressures will subside over time, as our manufacturing processes improve and automation increases. But, several sectors could see persistent inflation for years to come.

Prediction #4: Business/Economic Growth Will Slow

Business growth is the leading predictor of economic growth. When businesses invest heavily, money flows freely through the economy, spurring growth. When businesses tighten their wallets, the opposite happens – economic growth slows, hurting all sectors.

Covid was a reminder to many business owners that black swan events can and do occur. And when they do, businesses can lose months or years of revenue and investment. While Covid remains fresh in our minds, many business owners are approaching future investment cautiously, modulating growth to avoid any major risk from another wave of Covid or another unexpected global event.

This slowdown in business investment will likely impact broader economic growth, and I would expect that over the next several years – even once we’re past this current recessionary period – GDP will likely track lower than it did during the last economic expansion.

Prediction #5: Economic Cycles Will Be Shorter

Over the past 170 years, the US has seen 34 recessions. On average, that’s a recession every 5 years. Though that average has been increasing over the past couple decades, with the 2008 recession followed by a record-setting 12 year cycle.

But, given the predictions above – increased volatility, reduced globalization, inflationary pressures and slowly business growth – it’s reasonable to assume that future economic cycles will likely compress. I don’t believe we’ll see a decade-long boom again anytime soon.