Trends, themes and challenges for the world economy in 2022

1. India can't miss

125 million people aged 20 to 25 live in India today, versus 88 million in China, 25 in the EU, 22 in US and 4.1 in the UK. Given that the size of the indian and UK economies are similar, young britons will enter a job market 30 times larger, on a per entrant basis, than indian counterparts.

The Economist quotes this week that indians account for two-thirds of H-1B visas. The economy, flat since 2019, must dramatically transform to meet the potential of its youth.

2. Supply chains

In developing countries, logistical challenges remain a major constrain, representing a tax on consumption and labor.

To illustrate this issue, consider the sea route to Tanzania and its landlocked neighbors (a total of 170 million people). It depends on the Port of Dar es Salaam. This port handles an annual volume of 406 thousand TEU, a fraction of the 4.7 million TEU of South Africa or 19 million of UAE. Wait times are often quoted to be around 2 weeks. Given the demographic pressure, it is imperative to multiply the port throughput.

Or take Bogotá, a 10 million inhabitant city 2640 meters above sea level, where the route connecting with Medellín and on to the Atlantic sea is a dangerous single lane road, spanning steep mountain passes in a 14 hour long trip. Passengers, livestock, logging and transport vehicles mix in this narrow space. Building a railway or a two lane road would take tens of years. Until then, the growth prospects of Bogotá and Colombia overall are limited.

3. Decentralized finance and cryptocurrencies

Despite enjoying a dynamic ecosystem, most blockchain applications (so-called dApps) are expensive and slow due to ethereum, where a transaction costs between 2 and 6 USD and minutes to be executed.

Decentralized finance is more expensive and less flexible than traditional databases. Any eventual popular features of dApps can be copied to conventional platforms with immediate gains.

Cryptocurrencies have a market valuation of 2.2 trillion USD, and venture capitalists pour billions in related projects, and yet after a decade of development there are no significant uses.

4. Big tech and the cloud

Apple, Google, Microsoft and Amazon combined revenue in the last 4 quarters is 1.23 trillion dollars, with an overall profit margin of 30%. All four grew at over 20% year-on-year, and more is to come:

• By hosting business clients in the cloud, large tech companies are able to offer cross-selling opportunities at low prices but high margins (they help a player).

• Similarly, these companies enjoy economies of scope, as software and data are reusable, that enable them to enter new business lines with a technical edge (they become a player).

• Finally, tech companies outbid everybody else for the talent needed to stay in the race (they disable other players).

5. Financial services

In many parts of the world, the majority of transactions are done with cash. Cash management is a significant friction for retailers. Clients must carry cash, finding change, counting it, these factors add a cost to each transaction.

Better internet access and digitalization of payments across the world is an ongoing trend. Obtaining a debit card or a mobile wallet is today much simpler than 5 years ago. User identity verification is largely automated: the user can sign up, post the ID documents and get the application approved within the day, all from a smartphone.

6. Europe and United States

We can expect the monetary and fiscal stimulus to continue, and as a result, inflation.

A forceful response to inflation would imperil the short-term solvency of governments, whose debt to gdp ratio often rises to 150%, and have proven unable to quickly generate fiscal surpluses. In addition, a monetary tightening would depress financial prices and consumption, adding more strain to the treasury.

Therefore, strongly negative real interest rates will remain the norm over the next decade.

7. Electrical vehicles

Tesla sold around 1 million cars in 2021, while the industry overall produced 66 million. Tesla encounters resistance to build new factories (Germany hasn't approved GigaFactory Berlin 2 years after the application), raising doubts about EV scalability.

Therefore, global internal combustion vehicle fleet, and as a result, gasoline demand, will continue to trend up in line with the global middle class.

8. Renewable energy

Solar and wind plants are sprawling across the world. Yet, at the current 10% growth rate, it would take 30 years to reach 50% of the total power generation, as the current share is only 12%. Which means that gas and coal will continue to dominate in this decade.