當地緣政治衝擊遇上結構性趨勢 (只提供英文版)

The US-Iran conflict continues to monopolize market attention. An uneasy cessation of active hostilities appears to be in place. The outcome remains uncertain, with difficult negotiations ahead. We are now all trying to assess the damage to the global economy and how quickly we can recover from it. This is extremely important, but I think it's at least as important to understand how the Middle East crisis links to two underlying structural shifts in the global economy: deglobalization and the acceleration of innovation, with its impact on productivity.

The International Monetary Fund (IMF) just offered a rather dim view of the situation at its April spring meetings in Washington, DC. The IMF laid out three scenarios for the global economy: bad, worse, and worst. Even if the war ends in the coming weeks, the IMF argues that a lot of lasting damage has already been done. If the conflict stretches into next year, it might trigger a global recession.

Financial markets, though, appear to have a much less pessimistic take, with US equity indexes at or near record highs and credit spreads remaining very tight.

Two-sided or one-sided?

The IMF focuses on the downside. Financial investors still see risks as more balanced, two-sided. Are they being complacent? If the truce holds and shipping through the Strait of Hormuz normalizes over the coming months, the damage can be contained. IMF Managing Director Kristalina Georgieva herself conceded that the world has become less energy-intensive since the 1980s, and the organization’s own work on oil shocks acknowledges that recent episodes have hit output less than those in the 1970s—thanks to improved monetary frameworks and lower energy intensity. The United States, in particular, is much more insulated, thanks to its energy independence.

The bigger picture

There is, however, something which I see as more important and that both international institutions and markets are underweighting. This latest energy shock is landing on top of two structural trends that are, in my view, the most consequential factors reshaping the global environment: retrenchment in globalization and the productivity-boosting innovation cycle.

The two differ in one crucial respect. The slump in globalization is, by definition, global—almost every country is affected as trade rules fragment and supply chains reorganize along geopolitical lines. The productivity boom, for now, within advanced economies is essentially a US phenomenon. That asymmetry has important market implications.

I believe both trends are likely to push yields in the same direction. The retreat from globalization reduces the efficiency of global trade, and reduced efficiency means higher costs—hence structural upward pressure on inflation in most countries. Higher inflation implies higher nominal yields and, to the extent investors demand compensation for inflation uncertainty, higher real yields as well.

Faster productivity growth implies a higher neutral real rate; when productivity accelerates, the real return on investment in the economy rises, and equilibrium real rates must rise with it. This bears directly on the Federal Reserve's (Fed) neutral policy rate—and on real bond yields.

The US productivity story is real

The acceleration in US productivity is not a forecast—it is already in the data. Since mid-2023, US productivity growth has averaged roughly 3% annually, about double the pace of the previous decade. This acceleration reflects the diffusion throughout the economy of innovations carried out over the past 10 to 15 years. It does not yet meaningfully reflect the most recent generative artificial intelligence (GenAI) advances. It does embody the efficiency gains delivered by AI in the form of machine learning, but not the impact of the large language models which have become synonymous with AI. The lag between innovation and productivity gains is a regular pattern. Companies must first be convinced a new technology is worth adopting, then invest to embed it into the capital stock, and then reorganize operations, retrain workers and redesign incentives to capture the gains. In 1987, Nobel laureate Robert Solow famously quipped that "you can see the computer revolution everywhere except in productivity statistics." It took until the mid-1990s for productivity to accelerate. We are living through a period of massive investment and innovation pushing the frontier of GenAI applications and eventual adoption. The payoff to this likely lies ahead of us and could endure in a transformative fashion.

The future will be unevenly distributed

If GenAI fulfills even a fraction of its promise, the productivity boom can be sustained and extended. We'll have to be patient. The more disruptive large language models prove to be, the more organizational effort they will require to be adopted, and the longer the lag before the impact shows up in the data.

An important question is whether the productivity benefits will spread globally. The assumption is that they will. But access to technology is not the same as ability to use it. Flexibility, not access, is the binding constraint. The 1990s offer an instructive lesson. Between 1996 and 2005, US productivity growth doubled to about 3% versus the preceding decade. Over the same period, average annual productivity growth was broadly unchanged in the United Kingdom and slightly lower in France and Germany, while Italy had already begun its long descent toward zero productivity growth. Academic studies found that in Europe, subsidiaries of US-headquartered companies experienced substantially greater productivity gains than their European-owned peers. The difference was organizational flexibility. The AI revolution will most likely benefit most countries, but not to the same extent.

What the war actually reinforces

The Iran war is likely to compound the structural trends discussed above. The disruption to energy supplies is a vivid reminder of the fragility of global supply chains, and it will likely reinforce the trend toward deglobalization, or perhaps more accurately regionalization. Governments weighing reshoring, stockpiling, and energy-security investment before this conflict now have another concrete reason to accelerate. The energy shock will also cause at least a temporary spike in headline inflation, with a non-trivial risk of second-round effects if any eventual truce frays.

Implications for investors

All this reinforces my long-standing view that risks to longer-term yields are biased to the upside globally. Deglobalization pushes structural inflation higher. The productivity boom—concentrated in the United States—pushes the neutral real rate higher. The Iran war compounds both channels with a short-term inflation shock and a further incentive to rethink globalization.

Another factor pointing to higher bond yields, one I have frequently mentioned in previous pieces, is the combination of higher public debt stocks and alarmingly wide budget deficits in advanced economies. Here again, the Iran war is likely to prove an accelerator. Together with the Russia-Ukraine war, it has highlighted the need for greater defense spending across a wide range of countries. The need to bolster energy security could also fuel additional public investment.

We probably have a lot of market volatility ahead, and investors should remain nimble. The uneven impact of the energy shock is likely to create opportunities for investors attentive to the fundamental strength of different countries and industries. But the more important lesson, in my view, is the upward bias to inflation rates and bond yields in the years ahead. From an investment perspective, I would continue to focus on shorter-duration assets. We are approaching credit with caution, but finding opportunities within the various credit sectors as they still offer attractive all-in yields. We will continue to look for interesting opportunities to enter and expand exposure to emerging markets.