The World Economy Is Swerving, and the Destination Is Unknown
PHILADELPHIA—For decades, companies, investors, and policymakers operated on the comforting assumption that the global economy was underpinned by a relatively stable equilibrium. Macroeconomic and financial shocks were treated primarily as cyclical disruptions that could be managed to put things back on track toward a predictable destination—that of per capita GDP growth within a continuously globalizing economic and financial order. But this paradigm is now being challenged by geopolitical tensions, the weaponization of economic relations, the rapid advance of new technologies, and other factors.
Navigating economies and markets through this storm is possible, but it requires a commitment to building resilience, maintaining optionality, and demonstrating agility. That will not happen automatically, because there is now uncertainty about the theoretical and practical endpoints of many ongoing secular changes—from productivity and economic growth to supply chains and equilibrium interest rates. Moreover, the broader trade and payments architecture is evolving rapidly, adding to many firms’ operational complexities and planning uncertainties.
For those who think this is an exaggeration, consider how our new reality has been playing out this year across three domains. First, geopolitical tensions are motivating new efforts to exploit and weaponize critical supplies. The post-Cold War era of frictionless globalization has given way to a scramble for political leverage via existing interdependencies. State and non-state actors alike have recognized the potential to wield asymmetric power by throttling the physical arteries of global commerce. From maritime disruptions in the Strait of Hormuz and the Red Sea to the fierce contest over critical mineral supply chains, geography is being systematically weaponized.
But these strategies have no clear endpoint. No one knows where the current geopolitical fragmentation will lead. Some hope for what former UK Prime Minister Gordon Brown calls “managed globalization light,” others fear an irreparably fractured international order, and some still long for the old days of unfettered globalization and multilateral rule of law. Yet at this very moment, shipping routes are having to be rewired, and maritime risk premiums remain elevated. With no grand diplomatic settlement on the horizon, multinational corporations will be forced to shift further from efficient “just-in-time” supply chains to building in more costly “just-in-case” redundancies.
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