World Economic Forum: Five transformative trends impacting global finance

Compared to a few years ago, the global economy is now vastly different. Since the outbreak of COVID-19, significant structural transformations are taking place. De-globalization, decarbonization, demographics, surging debt, and digitization are impacting the world economy and financial markets.

These five fundamental forces ("5D") establish a multidimensional decision-making space for policymakers and investors. These forces require careful evaluation, as they have the potential to exert transformative impacts.

1. Deglobalization

Against the backdrop of intensifying trade frictions, escalating geopolitical tensions, and heightened concerns over supply chain security, economic protectionism and regional trade cooperation are showing signs of resurgence, while the process of globalization continues to slow down. According to statistics from the International Monetary Fund (IMF), the number of global trade barriers has surged from over a thousand in 2019 to over three thousand in 2023. Given the new US administration's stated intention to strengthen tariff policies, this trend is likely to continue to escalate.

The retreat of economic globalization poses a severe test to development and simultaneously drives up price levels. Trade barriers undermine the efficiency advantages of division of labor, collaboration, and market competition, limiting economies of scale, while financial fragmentation hinders international capital flows, exacerbating the instability of the financial system. According to research by the IMF and BIS, after excluding other influencing factors, the price increases in export-oriented economies are generally more moderate.

The reversal of globalization has caused differentiated impacts on different regions. Emerging markets and developing countries, due to their high dependence on foreign capital and uncertainties in energy and commodity supply, may experience more significant negative effects. If the dominance of the US dollar as an international settlement currency continues to strengthen, it may exacerbate the pressure on these economies. Furthermore, the trend towards deglobalization may weaken the synergistic effect of the international community in addressing global issues such as climate change.

During the process of trade pattern reconstruction, some regions have benefited from the breakage of old economic and trade ties and the establishment of new cooperation mechanisms, especially Southeast Asia, which has formed a new trade pattern amidst changes in Sino-US relations.

2. Decarbonization

Climate expert Veerabhadran Ramanathan pointed out that if greenhouse gas emissions are not curbed, the rate of global warming will far exceed expectations, potentially leading to a global disaster comparable to the scale of the pandemic by 2030. Global warming has triggered frequent meteorological disasters, including raging wildfires in Australia, heavy rainstorms causing disasters in the Middle East, intensified floods in Western Europe, and an increase in hurricanes in North America. Responding to climate change requires significant investment, which will lead to price increases. Financial support is crucial for post-disaster reconstruction, but if productivity or the tax base fails to increase simultaneously, inflationary pressure will ensue. Regardless of the pace of climate change, the implementation of adaptation strategies cannot be separated from financial injection, and this fiscal demand will inevitably trigger inflation. Although green bonds and sustainable loans continue to expand, their volume is still insufficient to address current challenges, necessitating government financial assistance to compensate for the shortfall.

3. Demographic changes

Aging populations and declining fertility rates are leading to labor shortages, while healthcare and pension expenditures are climbing due to increased longevity. The Jackson Hole conference showed that the financial sector has a strong reaction to fiscal risks and their monetary policy implications. However, there are uncertainties in reshaping social agreements, as aging populations and rising dependency ratios will undermine efficiency, drive up prices, and increase fiscal burdens.

4. Debt

The increase in fiscal expenditure has exacerbated the pressure on government debt, with global debt levels currently reaching a record high. Statistics from international research institutions show that the total global debt has climbed to $307 trillion, with developed countries accounting for the majority. It is particularly noteworthy that the economic stimulus plans launched by countries during the pandemic directly led to a surge of $50 trillion in government debt in developed economies. The peak of 20-year interest rates may push up the debt risk premium, increasing the burden of debt repayment. Taking the United States as an example, the debt repayment expenditure in 2025 is likely to exceed the defense budget, and the trend continues to deteriorate.

The rise in fiscal debt will constrain the government's investment in key areas such as infrastructure, education, and scientific research, which are the core driving forces for sustained economic growth. Furthermore, if government borrowing drives up interest rates, it may have a crowding-out effect, increasing the financing costs for the private sector. High-yield bond issuers in the US are facing significant pressure, and they will face a peak repayment period in the coming years. According to statistics, approximately $200 billion in debt is set to mature between 2024 and 2025, and the total amount of maturing debt between 2024 and 2028 is as high as $1.1 trillion, placing heavy financial pressure on related companies.

5. Digitalization

Facing the severe challenges of the global economy, the digitalization process is demonstrating strong momentum of development. Despite the uncertainty surrounding future trends, technological innovations represented by artificial intelligence are likely to become a key factor driving economic growth. Research indicates that generative AI (GenAI) possesses significant economic value. Relevant predictions suggest that if this technology is widely applied, annual productivity growth could reach around 1.5%, while bringing economic benefits ranging from $2.6 trillion to $4.4 trillion to various sectors. Although historical experience reminds us to adopt a cautious attitude towards technological change, GenAI, with its advantages of strong universality and wide application, is expected to break through traditional limitations and drive innovation to achieve greater value.

A new era of global growth

Under the intertwined influence of multiple factors, the economic situation tends to become more complex. The imposition of additional tariffs has suppressed business vitality, resulting in shrinking tax revenue and widening fiscal deficits. Furthermore, investments in low-carbon transformation and addressing population aging have also increased the fiscal burden. The combination of these factors not only drives up price levels but also weakens the effectiveness of monetary regulation. Digital innovations such as GenAI can optimize energy consumption, promote breakthroughs in environmental protection technology, and are expected to curb inflation. Through large-scale application, they can drive productivity growth.

Despite the severe challenges posed by fundamental forces to economic growth, they have created special opportunities for specific sectors such as finance. To address the shift in demand, effective regulation of large-scale capital flows is urgently needed. Under the combined influence of multiple factors, the evolution of the financial landscape will create new development space for asset allocation, fund operators, and risk control mechanisms. By optimizing the collaborative operation of business chains and enhancing market adaptability, various challenges that arise during the transformation process can be effectively resolved.