Pandemic aftershock: 10 global economic trends

Disclaimer

The fight for vaccines, the transition to a digital economy, energy transformation, and the new geopolitical paradigm will dominate macro trends in 2021.

Pandemic: The long-running disaster

2020 has been a great reminder that our world is still vulnerable to a catastrophic pandemic. COVID-19 has shaken the world on a massive scale since March. It has infected more than 80 million people in 218 countries and killed more than 1.7 million in less than a year [1].

Despite human ingenuity, the world has long been exposed to devastating pandemics. In 1492, the European settler’s smallpox plague wiped out 90% of the Native American population. Nearly five centuries later, Spanish flu infected 500 million people, with a death toll between 17 and 50 million in 1918. The disastrous pandemics are part of a long-running cycle of human civilization that could happen again [2].

Aftershock: The rise of a digital economy

After months of lockdown, the world started to see the light at the end of the tunnel. Pfitzer-BioNTech and Moderna announced successful COVID-19 vaccine trials. Governments and health authorities began the approval process and distribution with the hope of starting the vaccination before the end of the year [3].

Meanwhile, the pandemic has transformed how people manage economic activities when staying at home and created a “new normal” towards a digital economy. Video conference calls, virtual classrooms, and online shopping were nice to have before the pandemic. Today, they have become a must-have and will continue to become a growing trend after the pandemic.

Above all, the pandemic-induced digital economy has accelerated the disruption in brick-and-mortar businesses. The transition from the analog to the digital world will highlight the global economy’s growth in the year ahead.

10 global economic trends

The digital economy will be the driving force for growth in 2021 and beyond. Furthermore, other ten global economic trends will shape our world as the new year approaches. It will begin with how the countries will fight for vaccines, transition to energy transformation, and face the new geopolitical paradigm.

1. Vaccine battle

The main battleground of the first quarter of 2021 is the fight for vaccines. While every country must win the battle to end the lockdown and re-open its economy, the prolonged recession will trigger more job loss, poverty, and social unrest. It will make a recovery more difficult, create further instability, and collapse the economy.

In the meantime, governments have released a massive stimulus package to help individuals and businesses survive during the pandemic. Yet, financial support will not continue forever as it is only temporary until the economy recovers. It will bring the countries deeper into debt and make future generations pay it down. Hence, the battle of vaccines is significant to save human life and critical to rescue the economy.

Pfitzer-BioNTech, Moderna, and AstraZeneca will be vital players in the vaccine battle. However, R&D and clinical trials are expensive in the pharmaceutical industry due to the high failure rate. It may hurt profitability despite significant future revenue. The stocks did not perform well despite good news from the vaccine development.

2. Digital economy

The digital economy becomes the cornerstone of economic growth in 2021 and beyond. Anything from work, school, shopping, news, entertainment, banking, trading, movies, music, games, dating, fitness, and social media are available at everyone’s fingertips. A decade ago, smartphones and other digital devices were only affordable to the upper class. But thanks to the free market competition, they become available to everyone of all ages.

The digital economy trend will continue to grow as Zoom call replaces commuting to work while Coursera brings courses from top Universities to everyone globally. Robinhood allows retail investors to buy and sell stocks without commission from the mobile phone while Netflix streams favourite movies and TV shows to people’s living rooms and devices.

The pandemic-induced “new normal” has transformed the economy from analog to digital. The trend has eroded brick-and-mortar companies like retail stores, fitness chains, and restaurants [4]. And the key enabler for the digital economy is the innovation of digital currency.

3. Digital currency 

The public has an obvious misconception about digital currency due to the increasing popularity of cryptocurrency. In this context, government-issued money like the US Dollar will become a digital currency for electronic transactions. It is because there is no physical paper money exchanged hands.

The government-issued digital currency will still be the dominant medium of exchange in the years ahead. All transactions, from Apple News subscription to buying workout gear from the Lululemon online store, utilize digital payment in government-issued currency. Some stores even banned physical cash during the pandemic as it can be a medium of virus transmission.

Bitcoin

The emergence of cryptocurrency as a non-government-issued digital currency began shortly after the 2008 financial crisis. The goal is to eliminate the government’s intervention in the money supply. While it uses a complex algorithm to mine the coin and utilizes blockchain technology to create a digital ledger, all transactions are authentic and cannot be duplicated.

Despite its popularity, cryptocurrency is not a legal tender of any country. It became viral among the Millennials and created buying frenzies. It brought Bitcoin, the first cryptocurrency, to an all-time high during the pandemic [5]. The phenomenon turns high-performance computers into crypto-mining machines consuming seven nuclear plants worth of electricity [6].

Speculation

However, the fear of missing out (FOMO) by the young Millennials and speculators will drive the value of cryptocurrency up against any foreign exchange. This is because some investors view cryptocurrency as the new safe haven after gold during economic turbulence.

Note: Gold is no longer a legal tender, but central banks still use it as the main reserve on their balance sheet. Investors also utilize gold as a medium to carry value and as a hedge during an economic downturn.

4. Technology boom

The technology sector is the backbone of the digital economy. It has already contributed nearly 30% of the US Gross Domestic Product. Wireless broadband, quantum computing, and artificial intelligence are the key growth areas which will enable technological breakthroughs in autonomous driving, remote surgery, and space travel.

The hardware innovation makes smartphones smaller, faster, better, and stronger than the computer that landed Apollo 11 on the moon in 1969. The software applications also allow people to do anything digitally, from streaming movies to attending university lectures online. It is all possible because of the semiconductors, processors, and wireless broadband innovation.

Industrial revolution 4.0

The investment in technology will continue to grow and drive more IPOs in the technology space. Recent success from Airbnb, C3.ai, and DoorDash was a strong testament that the technology boom was just at the beginning of the fourth industrial revolution. Machine learning, the Internet of Things (IoT), and other smart technologies will drive the future economy and shift human skills from physical labour to an intellectual level.

The Industrial Revolution 4.0 can only be successful with robust internet connectivity and advancement in wireless broadband, leading to space technology growth.

5. Space race 

Most people view rocket technology as a vehicle for space tourism. But, the reality is well beyond bringing passengers for sightseeing in space. The space race is about carrying humans and cargo into orbit at an affordable cost. And one of the most precious loads is satellites.

The satellites are the critical infrastructure for wireless broadband, 5G technology and beyond, navigation, telecommunication, and internet connectivity. While navigating airplanes, drones, ocean liners, and autonomous vehicles, they also support weather monitoring, television broadcasts, and military defence systems.

Trillion-dollar industry

SpaceX is the current winner in the private space race after launching the first astronauts to the International Space Station using reusable rocket technology. The technology will be the source of competitive advantage as it can launch satellites cheaply. It creates strong bargaining power and allows them to monopolize the low-cost satellite launches [7].

Space is a trillion-dollar industry that is still at an early stage. Investors are pouring billions of dollars to bring passengers to space and begin the human colonization journey to Mars. The goal of multi-planetary species may soon be a reality as SpaceX’s Starship is in the late-stage trial before commercial use [8].

6. Electrification 

Electrification for vehicles became a big theme in 2020 and will continue for the next year. Tesla leads the way as the first electric carmaker to be a member of the S&P 500 index. The addition became a symbol that the electric vehicle is no longer a niche project but it becomes an industry that is too big to fail.

European automakers like BMW, Porsche, and Volvo have transitioned their business model into electric cars as demand increases in Europe [9]. The US automakers were in the process of transformation, but the growth slowed down when Trump’s administration withdrew from the Paris climate agreement [10]. However, Tesla has demonstrated that electric vehicles can be a viable investment.

China leads in EV market

The critical resource to accelerate the vehicle electrification trend is battery technology. The increasing demand will drive the mining sector in lithium, nickel, and cobalt. China holds the integrated value chain from raw materials, battery production, and electric car manufacturing.

In addition, China has a massive 700 million middle-class population that will absorb electric vehicles’ supply. The country also incentivizes switching to an electric car to reduce its chronic air pollution [11]. Chinese electric carmakers like Nio, BYD, and Li Auto began expanding overseas, eroding Japanese, European, and American market share.

7. Energy transformation

Public awareness about climate change has transformed the energy system permanently. People once lived in a world of not enough fossil fuel to a world of abundance. The United States became the largest oil producer after Saudi Arabia and Russia, thanks to hydraulic fracturing technology. It has created an oversupply of oil and lowered the global oil price for many years [12].

While the oil price has declined since 2018, the Coronavirus pandemic and Russia-Saudi price wars have worsened it. Once the largest company in the world a decade ago, ExxonMobil was removed from the Dow Jones Industrial Average. It shows that investment in hydrocarbon projects is no longer attractive due to its contribution to climate change and yields a negative return in a world of oversupply.

The oil price hit minus $37.63 per barrel at the pandemic’s height as demand dried up. It recovered largely because OPEC agreed to cut back on production, and US shale oil output production declined. The US shale producers require high oil prices as they require continuous capital investments in drilling and fracking to maintain production due to wells’ fast decline.

Low-cost producers will survive

However, Canadian oil sands have become more attractive to investors due to their high volume, low decline, and low production cost. Once it was the most expensive oil per barrel, the industry managed to lower the cost to $17 per barrel due to innovation and continuous improvement [13]. The industry also pioneered carbon capture technology to reduce the greenhouse emission impact of climate change.

The energy transformation from scarcity to abundant fossil fuel motivated companies to invest in growing sectors like electrification, renewable, and green energy. The abundance of natural gas will become the new source of power generation, replacing coal. It will also become the feedstock of zero-emission of hydrogen fuel as LNG technology allows the shipment to a growing market like Asia.

The only survivor in the energy sector is low-cost producers. OPEC and US Shale producers will start production as soon as the oil price increases. It will create price volatility in the short-run and long-run price decline if the oil demand continues to fall as the demand for electrification and hydrogen fuel pick up. The demand for crude oil will not go away anytime soon as it is the primary raw material for our modern civilization [14].

8. Geopolitical tension

China’s ambition to become the new economic superpower has challenged America’s dominance. The geopolitical tension has shifted from the Middle East to the Asia-Pacific region. The main contributor is that the US has less reliance on Middle Eastern oil when it becomes the largest oil producer, but the US and its allies face increasing pressure from China in the South China Sea.

The Trump administration launched a trade war against China to minimize its dominance in the global economy. Furthermore, the incoming Biden administration has started a coalition approach with NATO allies over direct retaliation to suppress China and Russia’s geopolitical dominance [15].

The geopolitical tension will likely continue as China sets out to overtake the US as the largest economy in 2028 [16]. The condition will reduce the US and its allies’ influence globally and increase China and Russia’s dominance. Therefore, the geopolitical balance will shift to the East and create a new world order if the trend continues.

Due to the growing threat and rivalry, more tension, instability, and escalation will continue from both sides. Defence spending is expected to increase, but the pandemic’s massive stimulus package will limit it. The companies who have already been awarded defence contracts, like Amazon AWS, the cloud provider to the Pentagon, Boeing, and Lockheed Martin, will perform well. But, the government will likely postpone the new tender after the pandemic [17].

9. Brick-and-mortar struggle

Businesses with extensive brick-and-mortar exposure and a small digital footprint will struggle throughout 2021. The fight for the vaccine is still challenging with the emergence of a new COVID-19 variant in the UK. It shut down travel and banned its citizens from entering other countries.

Airlines, hotels, resorts, theme parks, universities, malls, retail shops, office towers, cruise lines, and restaurants will have difficulty recovering as they have to operate at reduced capacity even after the pandemic. Besides, the pandemic fear will not go away for many years.

However, companies like Starbucks, Lululemon, and Walmart will perform exceptionally well after a successful digital transformation from brick-and-mortar-based business. They have captured significant revenue from online sales to offset the brick and mortar loss. 

10. Slow recovery 

The economic recovery heavily relies on vaccine delivery and immunization. The countries that produce the vaccine will have priority and can re-open their economy faster than the others. Therefore, it will disadvantage developing and third-world countries with a large population.

Only Canada, the United States, and the United Kingdom are among the best-supplied per capita countries [18]. Therefore, the global economic recovery will be slow, and it will take strong cooperation from the vaccine producers.

How do global economic trends impact the investment prospect?

The technology sector will continue to dominate as the digital economy keeps growing, accelerating the brick-and-mortar business model’s disruption. Wirelines broadband, big data, and AI will fuel the world economy from financials, manufacturing, internet, telecommunication, and digital payment to e-commerce. The world will be more connected, and businesses will become more efficient. 

Chinese companies will continue to dominate the global economy. But, it will face intense competition from India, Vietnam, Indonesia, and other emerging economies. Nevertheless, China is shifting from manufacturing to technology with the rise of Huawei’s 5G wireless technology, Alibaba’s global e-commerce network, Tencent’s digital payment, and BYD’s battery technology. It will bring China into direct competition with the US and its allies, which will escalate in the years ahead.