Is the worst over?

How resilient is our economy in the current polycrisis? Is the worst over and what lessons have we learned? Henry Allen, Deutsche Bank analyst, talks about this and other crises and explains how economies are reacting.

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The sky is leaden and veins of rain are beginning to form on the window. Smiling back at me on the computer screen is Henry Allen, a macro strategist at Deutsche Bank Research. His sunny demeanour is in stark contrast with the tempestuous weather outside, but how bright is he when it comes to today’s polycrisis and how well equipped we are to tackle the challenges it brings?

Multiple bad weather fronts

The numerous, overlapping crises of our time represent an unusually volatile situation, Henry says. Undoubtedly the most challenging factor of late was the Covid-19 pandemic that initially caused the global economy to contract far more than we had seen since the Great Depression of the 1920s/1930s. It was a massive global shock and caused gross domestic product to fall far faster than during the 2008 global financial crisis.

We are still dealing with the aftershocks of what was effectively a global economic shut down and reboot: disruptions in global supply chains, continued high inflation, the energy crisis and a spike in food prices. Furthermore, debt levels remain high after governments borrowed massive amounts to get through the pandemic.

Necessity is the mother of invention.

Withstanding the storm

How do economies navigate these kinds of storms? “Necessity is the mother of invention,” Henry says. “When you’re dealing with a big shock like Covid or energy shortages, you’re spurred to think differently.” In response to the energy crisis, for instance, economies are moving to diversify their energy sources, eliminating or at least reducing their reliance on others. The OPEC oil embargo of 1973 forced countries to do the same. This time, the move to diversify has given renewable energy sources a real boost – a development that now needs to continue, Henry says.

Another positive example of how industries can cope with a critical situation is collaboration. Take the pandemic for instance. Before 2020, most countries were convinced that vaccine development would take years. With governments, the private sector and civil society all collaborating, though, we had vaccines ready in just one year.

For collaboration and innovation to work best, a robust framework is necessary; it acts a bit like an umbrella in the rain. In societies with fair legal systems and predictable business environments, people feel confident to invest, knowing there is some form of safeguard when storm clouds gather. Stability is a crucial factor, especially when external influences like pandemics and resource scarcity render our systems fragile.

Early warning system

“There is often a tendency to look back on previous problems and see them as being easy,” Henry says. Once a crisis has passed, things look easier and more predictable because we know the outcome and we know how we solved these problems. In this context, Henry refers to economists Ken Rogoff and Carmen Reinhart. Their book “This time is different” is based on the belief that people ignore the past, brushing off concerns and finding reasons why the current situation is different – despite the fact that the basics of economics do not really change.

I think we will inevitably see more crises in the future.

Financial crises tend to occur in areas that people think are safe but that turn out not to be – as in 2008 when people thought subprime mortgages were safer investments. They turned out to be much riskier and led to a lot of other problems. “I think we will inevitably see more crises in the future,” Henry says. “But hopefully we won’t make quite the same mistakes as in 2008.”

One method of prevention is an early warning system. Governments and economies should invest more in early warning systems to detect pandemics and other crises faster, before they become a big problem. Of course, pandemics – by nature – are very difficult to deal with. Paradoxically, the deadlier a disease, the faster it is detected. A less deadly disease often spreads before people realise there is a problem. We have certainly learned lessons from the pandemic. Lots of companies have massively improved their remote infrastructure, for example, and are much better at keeping business going.

Brighter spells to come?

Historically speaking, crises occur frequently, and they won’t stop in the future. “It´ll be interesting to see in ten years’ time how we look back on the current situation. But I think you can already see a few signs”, Henry says. The good news, he believes, is that most of the major economies are now roughly back at or above their pre-COVID level, having made a good economic recovery.

I think the global economy is going to be much better looking forward – and our lives, too.

All in all, despite the crisis, we see an improvement compared to 2008. Global literacy and education levels are at a record high. Average standards of living are far higher than twenty years ago. Henry is confident that in another ten or 20 years there will be technologies and new medicines that don’t yet exist. “I think the global economy is going to be much better looking forward – and our lives, too. We’ll get through new problems just as we did the old ones,” Henry says, just as the rain stops.

The interview was conducted by Annette Jentsch and Katrin Palm.

Henry Allen Deutsche Bank Research

About Henry Allen

Henry Allen is a macro strategist at Deutsche Bank Research in London. He joined after graduating university almost five years ago and is based on Jim Reid’s Thematic Research Team. He is involved in much of Deutsche Bank’s global macro coverage including the Early Morning Reid, and also published his own analysis of markets, politics and financial history. Henry holds a BA in Economics from the University of Cambridge.

Katrin Palm

Katrin Palm

… is responsible for digital campaigns and communication projects. As an optimistic person, she shares Henry's views and does not give up hope that we will learn from the current situation.

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