The New Decade: What to Expect

Deutsche Bank has published its research analysts’ contrarian ideas for what the coming decade may hold. Here are some of the most interesting…

The end of fiat money? With money no longer backed by an asset such as gold, there is always the risk that governments will electronically “print” so much of the stuff that it inflates prices. “Politically it is always too tempting to create money when nothing is backing it.”

The forces that have held together the current “fiat” system together with generating excessive inflation now look fragile and could begin to unravel.

Policy may shift away from monetary constraint towards fiscal expansion to favour low-paid workers. This will boost labour costs as there will no longer be an abundance of additional cheap labour in and from developing economies to counter it. High debt levels will make it harder (riskier) to tighten monetary policy. The current global trend of low inflation could reverse.

Will fiat currencies survive the policy dilemma that authorities will experience as they try to balance the need for higher interest rates to combat inflation with record levels of debt?

As a backlash against “paper” money develops, “demand for alternative currencies such as gold or cryptocurrencies could soar.”

Europe to lag? There’s a risk of relative deterioration in its global standing, “that Europe falls permanently behind the US and China in adopting the next generation of technological advances.”

Europe has no technology companies on the scale of Microsoft and Apple in the US or Tencent and Alibaba in China. When it comes to educating the next generation of top students, Europe lags substantially behind the US, which dominates the field in elite higher education. There is a risk that the technological imbalance could become entrenched. Given the continent’s relatively low military spending, this deficit in technology could also develop into a security issue as well as an economic one.

There is a similar story in financial services. None of the ten largest financial groups globally is based in Europe. Negative interest rate policy has hurt European banks and, by extension, lending to Europe’s real economy.

Another adverse factor is demographic deterioration. Europe’s population is ageing faster than America’s. By 2030 more than a quarter of Germany’s will be older than 65.

The worry is not that the European economy will begin to emulate that of Japan, with very low growth, but that it won’t even be able to do as well. Japan has remained wealthy and cohesive in spite of economic challenges. Bold decisions are needed to ensure that Europe does not fall further behind.

China’s consumer decade. The nation’s economy has been driven by a key theme in each of the last two decades: exports, and then public investment. The next one is set to be consumption.

Consumer spending continues to grow at an average annual rate of 8 per cent, despite the fact that Chinese save – that is, do not spend – a third of their incomes. By 2030 China could be the world’s largest consumer market, overtaking those of America and Europe.

One sector likely to do particularly well is that of low-tier cities and rural areas, where incomes and living standards are growing rapidly. Another will be the “silver economy” as the post-war baby-boom generation go into retirement… “rich, healthy and full of time for leisure.”

There’s going to be particular growth potential in the market for leisure services and products – travel, hobbies, wellness, entertainment.

The end of high profit margins. The sky-high levels of profits in the US and Europe are ready for a fall. They’re going to be hit by the returning power of labour, greater competition and higher taxes.

The billion cheap workers introduced into the world economy by China, India and the Soviet Union over the past four decades have now been absorbed. Companies are finding it difficult to source new politically-stable low-wage countries to which they can outsource work. At home, lower-paid workers are becoming activist. Businesses will have to get used to paying higher wages.

There’s the threat of more and higher taxes fuelled by populism. Politicians are also becoming keener on enforcing greater competition, for example by dismantling megaliths. Corporate debt will become harder to finance and more expensive.

Revolution in food distribution. E-commerce is transforming retailing in products such as electronics and clothing, and in services such as entertainment. Now it’s coming in fresh foodstuffs.

The meal kits concept didn’t exist ten years ago. Now it’s spreading fast. A pioneering example is Berlin-based HelloFresh, which has 2½ million customers in 13 countries. They are asked what they want to eat next week from a list of 20 recipes. They’re sent right-sized packages of ingredients to cook themselves. No bother with shopping. And no waste.

The on-line market for fresh foodstuffs is now worth $250 billion. It’s expected to triple over the next five years.

Because of the abundant data being generated, businesses are able to give advanced notice to farmers and other suppliers around the world of what they will need and when. A just-in-time approach minimizes wastage.

The entire food value chain is being transformed. By 2030 most supermarkets won’t be as we know them now, but electronic interface stores where you place your order for next week and collect what you booked last week, if you don’t opt for home delivery.

The rise of the drones. At present there are issues that hobble widespread use of these unmanned aerial vehicles, mainly safety-related. But they are being resolved. In the US alone it’s reckoned that within three years there will be 700,000 commercial UAVs operating; by 2030, more than 6 million. With the cost of an average delivery forecast to plunge to $2 apiece there will be huge demand for cheap, fast last-mile delivery.

Other benefits are becoming apparent – for medical emergencies, for example. In Africa Zipline has launched a programme to deliver drugs and blood to 2,000 health centres in Ghana and Rwanda by drone. “Dark” kitchens are starting to use them to deliver hot meals to homes. Regulators are being asked to approve the use of drones for traffic monitoring and mosquito spraying.

Precision-targeted medicines. Personalized drugs designed to treat patients that are matched to his/her genome now account for one of every four new drugs approved by US regulators. Some experts say that it’s going to be the defining medical technology of the 2020s.

The problem is cost. One of the biggest success stories of genomic medicine is Gleevec, a precision cancer treatment that saves 2,000 lives a year in the US. But at an average cost of about $1 million per life saved. By comparison a relatively simple and inexpensive treatment for HPV, which causes cervical cancer, saves the lives of 300,000 American women a year.

It may be hard to reconcile the huge expense of personalized drugs compared to equivalent spending on wide-scale public health treatments, particularly in countries with publicly-funded healthcare systems.

The end of cash and plastic cards? Cash is losing ground. In advanced economies two-thirds of people now prefer to use dematerialized vehicles (neither cash nor cheques) to make payments. But it’s still well-ingrained in many. In the US, Western Europe and Japan one third of people still consider cash their favourite. They find their spending easier to monitor, transactions fast and convenient, they have no trouble with acceptance, and their purchases remain anonymous.

In emerging economies, however, the move away from cash is likely to accelerate as a large part of the unbanked population is transitioning directly to smartphone-based payments. By 2016 cash was only used for 11 per cent of payments in China. There the government has built a world-class infrastructure to support digitization. It’s the world’s largest market for smartphones and e-commerce.

In the US plastic cards are ingrained in the culture and remain a dominant force, underpinned by the spread of contactless payment technology (you just tap a card reader). In Europe mobile payment is not yet popular either. Only 8 per cent of people use smartphones to pay. But the mobile technology is primed to take off over the next five years.

“It is only a matter of time before smartphones make plastic cards an obsolete tool.”

How governments will respond to record debt. In the US federal debt has risen from 34 per cent of GDP in 2000 to 78 per cent now. The Congressional Budget Office says it’s heading to 93 per cent in 2030 and thereafter to 144 per cent after two more decades. As many major economies “look vulnerable to secular stagnation themes, it’s hard to see government debt being anything but higher in a decade’s time.”

Preventing that could seemingly only be done by large-scale money printing (in place of borrowing) and “very aggressive financial repression” (savers being forced to accept interest rates below the rate of inflation).

By their aggressive intervention in bond markets (“quantitative easing”), driving down interest rates, central banks have invited governments to experiment with even more unconventional policies. In the 2020s it seems inevitable that we’ll see “helicopter money” (direct handouts of cash to citizens to encourage them to spend). And central banks will finance governments directly.

In Europe internal and external pressures are mounting on governments to spend more – especially those of countries perceived to be in a position to do so, such as Germany. It could see a three to four percentage points to GDP swing from fiscal surplus to fiscal deficit.

Political tipping points. Last decade the biggest developments in politics have been the emergence of a backlash against globalization, against immigration, and a rise of nationalism. There are several issues that have the potential to gain sudden political traction in the coming decade.

One is the generation gap fuelled by housing affordability. In the US the proportion of adult children living in their parents’ homes has risen from 10 to 17 per cent; in the UK from 25 to 35 per cent. It’s forcing more young people to delay life-defining moments such as marriage and children. They are starting to rally behind politicians promising property and wealth taxes, and measures to ease supply of and access to their own homes.

A second under-appreciated theme is falling trust in the European Union. Eurosceptic parties are increasing their support and influence. There is a distinct possibility that rising scepticism will lead to greater divisions within countries, or even calls for secession, as we are already seeing in Britain (Scotland) and Spain (Catalonia).

Another issue is the precarious state of southern European economies. The youth unemployment rate is now 28 per cent in Italy, 33 per cent in Spain and 34 per cent in Greece. The consequence is “simmering discontent.” Today’s populism could be just the start of a much bigger wave.

A fourth political risk is ageing populations. As the proportion of retirees grows, so does their voting power. Governments will be tempted to shower them with more generous pensions and other age-related transfers. The younger generations could find themselves alienated from the political process and fight back… as they already seem to be doing over climate change.

A defining theme of the new decade could be the emergence of generation war.

As ageing pushes a higher proportion of retirees into the voting population, governments will be incentivized into showering the elderly with more generous pensions and other age-related transfers, but that will stimulate discontent among young voters. As recent climate-change protests have shown, they’re quite capable of ratcheting up their concerns on the political agenda.

Are generation wars to be a defining theme of the next generation?

India’s promise. Over the next decade India’s economy is likely to grow 2½ times to become the world’s third largest. Ongoing structural reforms have significantly boosted its potential. Introduction of a goods and services tax and currency reform, apart from reducing tax avoidance, will incentivize a faster pace of digitization.

An increased focus on urbanization means that India will become one of the world’s leading sources of middle-class demand – more than twice the size of America’s — as incomes in real terms per person grow at an average rate of 5½ per cent a year over the next decade. By 2030 it will account for 17 per cent of consumption by the world’s middle classes. (China’s is expected to be 22 per cent; the US for only 7 per cent).

This will open up huge investment opportunities, particularly in sectors such as infrastructure, banking, utilities and industrials.

The risk of rising corporate taxation. Politicians with higher corporate taxes in their sights are gaining in popularity. Some American cities have started levying their own additional taxes on businesses; in Europe similar pressure is building. In the UK the new government is rolling back planned tax cuts.

The OECD’s proposals for global tax co-ordination include calls for a minimum rate of tax for corporations and requiring them to pay tax in every country where they sell goods, not just those where they have a base.

On-demand life. Over the coming decade global technology companies will pour money into developing “super apps.” They want to expand from being just platforms offering goods and services into integrated groups able to provide unlimited free deliveries of anything on demand. They will use artificial intelligence to manage every aspect of our on-demand lives.