Avoiding market myopia

In a world seemingly more volatile by the day, it’s hard to avoid market myopia. To help see through cyclical gyrations, and get a clear view of where we’re headed, EDC Economics has updated our list of key long-term trends that we’re paying attention to.

1. In less than 30 years, if the world fails to slow the pace of climate change, global gross domestic product (GDP) could fall by as much as 18%. While developing markets will bear much of the brunt of rising temperatures, extreme weather events will also impact Canada, the United States and Europe. For Canada, actions to limit the impacts of climate change will hit sector revenues and could lower GDP levels for decades. Taking action to achieve net zero by 2050 could accelerate growth in transition sectors, and mitigate some of the negative economic impacts.

2. The key to tackling climate change’s economic consequences is to invest more heavily in clean energy technologies that limit the damage already caused and by taking advantage of opportunities to promote more sustainable means of living. In order to meet the 2°C warming limit goal, renewables will need to account for 28% of our energy supply by 2030, and nearly 61% by 2050. The implied investments are in the $1 trillion to $3 trillion range every year, in order to transition the way we generate, store, transmit and distribute electricity.

3. The energy transition will place a huge importance on a new set of key commodities. This means that by 2040, demand for lithium is expected to skyrocket 45 times, while demand for nickel, cobalt and graphite is set to grow by 20-25 times. As a key producer, Canada can fulfil part of the demand. But, given that production levels here are unlikely to match reserves found elsewhere, we’ll need to encourage development of these resources while investing in complimentary technologies, like mineral recycling. 

4. One of the main issues around the extraction of these key metals and minerals is geopolitical risk, given where deposits are found. As of today, most of these minerals are produced by countries with degrading political stability, and this is going to have major implications for the development and rapid deployment of clean technologies.

5. A key concern in the wake of the war in Ukraine is the future of the globalized economy. Escalating competition between the U.S. and China could well result in a technological decoupling of the world, if not a complete reversal of many of the trends toward globalization. While a global trade system split along geopolitical lines isn’t our base case, the outcomes of such a scenario would have grave impacts on trading nations, like Canada. 

6. Supply chain optimization may have gained prominence because of COVID-19, but its importance won’t fade with the pandemic. Private venture capital investment in supply chain technologies has more than doubled since 2016. Going forward, we expect investment in new factories and distribution centres, or the re-engineering of existing ones, to help address shortfalls in storage space and drive productivity in supply chain management.

7. Developing market sovereign debt, on the rise prior to the pandemic, bumped up noticeably during the past few years. While interest payments were temporarily low due to accommodative monetary policies, higher rates going forward will put pressure on carying costs. This will divert limited and critical fiscal resources, and potentially create gaps in funding for much-needed infrastructure and utilities projects.

8. Global income inequality was another casualty of the pandemic. Once on the decline, it now looks like the gap between rich and poor is set to grow—both between and within countries. Soaring income inequalities could feed into an already heightened geopolitical risk environment, creating additional tensions. This is further exacerbated by a trend toward rising agricultural commodity prices.

9. By 2030, countries will be more urban and older. In fact, with the urban population growing by about 1.5 million people per week, nearly 60% of the world’s population will live in cities by then. The average age of the population is also set to rise, mostly among high- and middle-income countries, with the population above 60 years old expected to reach 400 million. Demographic shifts will have to be met with corresponding levels of infrastructure development and access to services, such as health care.

The bottom line?

While the volatility of the day has made it more difficult to see beyond the current market turmoil, a look at structural trends helps restore focus on the world we’re moving towards. This more farsighted view can offer a glimpse of the risks and opportunities that lie ahead, bringing greater clarity to longer-term strategy considerations.

This week, a special thanks to the analysts of the Research and Analysis Department.

As always, at EDC Economics, we value your feedback. If you have ideas for topics that you would like us to explore, please email us at economics@edc.ca and we’ll do our best to cover them.