Not Just Another Recession

To say that the last few years have been economically turbulent would be a colossal understatement. Inflation has surged to its highest level in decades, and a combination of geopolitical tensions, supply chain disruptions, and rising interest rates now threatens to plunge the global economy into recession. Yet for the most part, economists and financial analysts have treated these developments as outgrowths of the normal business cycle. From the U.S. Federal Reserve’s initial misjudgment that inflation would be “transitory” to the current consensus that a probable U.S. recession will be “short and shallow,” there has been a strong tendency to see economic challenges as both temporary and quickly reversible.

But rather than one more turn of the economic wheel, the world may be experiencing major structural and secular changes that will outlast the current business cycle. Three new trends in particular hint at such a transformation and are likely to play an important role in shaping economic outcomes over the next few years: the shift from insufficient demand to insufficient supply as a major multi-year drag on growth, the end of boundless liquidity from central banks, and the increasing fragility of financial markets.

These shifts help to explain many of the unusual economic developments of the last few years, and they are likely to drive even more uncertainty in the future as shocks grow more frequent and more violent. These changes will affect individuals, companies, and governments—economically, socially, and politically. And until analysts wake up to the probability that these trends will outlast the next business cycle, the economic hardship they cause is likely to significantly outweigh the opportunities they create.