The British were the first to realise the magnitude of public debt when their efforts at providing tax cuts to spur the economy hit a wall. This was followed by the Turkish economy going into hyperinflation, the US Treasury yield briefly jumping over the 5% mark and just last week the German Supreme Court preventing the government from using crisis funds for 2023 and 2024.

While we do not see governments in developed markets going under because rates have risen, we struggle to see continuous positive growth surprises in the near future for two main reasons. The first because the bar is high due to past spending, and the second is that the wave of new spending will eventually ebb off. This is why safe-haven assets such as the CHF will continue to thrive.

Switzerland: Continued stable inflation into 2024

Despite global inflation, we expect the Swiss National Bank (SNB) to keep rates steady in 2024. Swiss inflation is generally more stable, which we recently saw when spikes in inflation due to supply shortages and rising energy costs were not as severe. We expect Swiss inflation to remain close to the SNB’s 2% target, with a slight rise in early 2024, due to the considerable extent of administered prices in Switzerland. According to Eurostat’s definition, the weight of administered prices in the Swiss consumer basket is 27.5% – the largest in Western Europe. 

Administered prices are the price of a good or service as dictated by a government or centralised authority, as opposed to buyers and sellers through supply and demand, examples include public transportation or healthcare. While administered prices reduce inflation volatility, they also contribute to delayed moves in inflation. Given such a delayed rise in the first half of 2024, the SNB, will likely see no reason to rush to cut rates helping it keep inflation steady.

And what about the rest of the world?

While the Swiss economy has responded well to the rise in unprecedented government spending, the same cannot be said for the rest of the world. The bond market has reacted anxiously to all incoming budget news. Not a single week passes without supply worries pressuring bond prices in the US, the UK, or elsewhere, with even German debt reacting negatively to the news that the debt brake might be suspended again.

The reversal from extreme financial repression to quantitative tightening has been abrupt and painful. But if we leave the market psychology aside, we still see budget shortfalls and government refunding needs that are manageable with outstanding debt levels still below actual nominal GDP growth rates. According to our metrics, it should even be possible for the US debt supply to be well absorbed over the coming months.

Circular Economy: Ambition vs reality

Sustainability efforts will also be important for governments to consider and will require future spending. The 28th Conference of the Parties (COP28) in Dubai is starting this week. One of the topics on the agenda – besides climate change – is the fight against plastic pollution. A few weeks ago, the United Nations released a ‘zero draft’ of a global plastics treaty, aiming at a reduction of plastic waste, and the phasing out of harmful plastics in particular.

Ambitions are high, with the European Union’s ban of single-use plastics or the ‘Alliance to End Plastic Waste’ as examples. However, reality has been different. As of last year, these efforts only managed to reduce the amount of unmanaged plastic waste by around 1%, showing there is still a long way to go.

According to the Organisation for Economic Co-operation and Development (OECD), plastic production has more than doubled to over 475 million tonnes per year since the turn of the century and it could reach more than 1 billion tonnes by the 2050s. What the OECD also notes is the fact that today’s waste management and recycling infrastructure is insufficient, and both will require significant investment in the near future.

What does this mean for investors?

Taking out the drama of recent headlines, including the record government deficits, soaring inflation and a growing need for infrastructure investment to tackle climate issues, we do not think the world is heading for a global debt crisis anytime soon.

Governments in developed markets will be okay because of rising rates, even though they will face headwinds going into 2024 and the fiscal spending spree is likely over. In our view, demand is continuing to grow in line with nominal GDP, which should provide investors with some reassurance looking into the next year.