We live in an uncertain world where the old norms no longer apply. This year at the Italian Hospitality Investment Conference Carlo Altomonte, associate professor of Economics at Università Commerciale Luigi Bocconi, gave an incredible talk explaining why.
Not much was directly aimed at travel tourism or real estate but from his assessment of where we have come from and where we might be going, it was possible to draw some conclusions about the impact on the sector that Hospitality Investor covers.
Below I've pulled out some of his quotes from the session and added come commentary around it.
The world order as it was
According to Altomonte:
“The global governance model in which the US has been for the last 30 years is unsustainable for the United States from a macroeconomic point of view”
The system Altomonte is referring to is essentially the free trade model that operated within a set of rules overseen by the World Trade Organisation with the US acting as supervisor following its victory in the Cold War. Its position of relative strength also ensured security, especially over fossil fuel inputs, which effectively underpinned the global economy.
“And the model worked. It guaranteed three and a half to four and a half per cent of growth to the world on average over the last 30 years. The model overcome the great financial crisis. It overcome the pandemic. It survived all those bigger shocks. It raised from poverty 1.5 billion people in the world. It allowed all of you to invest and move around in the world. That was pretty good, with some shortcomings, of course, but it worked.”
The breakdown
The problem was that the model didn’t work for a couple of countries in particular: Russia is the obvious one, another ironically is the United States itself and in the last two years we have seen both play their part in the fracturing of the system.
“[The] Russian invasion of Ukraine essentially cracked severely two pillars of this model, the inputs on energy, because Russia started to weaponize politically, the access to energy, which is the first time that we saw that over the last 30 years. And second, however, it also started to affect the ability of writing market rules.”
The impact on energy supply is obvious, the impact on governance less so.
On the latter Altomonte highlighted a vote in the United Nations General Assembly which had been to condemn Russia’s aggression against Ukraine.
You can see on the below slide the countries voting for (green) against (red) but it is the countries abstaining in yellow that are the most interesting (those in blue were absent).
“[These countries are] abstaining on something that is in itself the most blatant violation of international laws since 1945 ie aggressing a country without provocation in times of peace.”
Then there was a further fracturing of the system:
“The election of Donald Trump again, cracked the system under two fundamental under the other two fundamental pillars, again on markets and on security.”
Firstly on markets you had liberation day and the impact (or at least threat) of tariffs and on security look at Trump’s comments and actions around NATO.
And according to Altomonte "the old global economic order does not serve the purpose of the United States" and at the heart of it is a financial metric called the Net International Investment Position (NIIP), which is the difference between how much of the world a country owns versus how much the world owns of a country.
Since 2024, the US NIIP has worsened and by Q2 this year it stood at -$26 trillion.
“This is due to the fact that the dollar appreciates, this is due to the fact that people invest into US stocks. Everybody wants to buy Apple, Meta, Google, everybody from the rest of the world. People use the dollar and buy US Treasury bills. But that essentially means that there is capital flowing in the US from the rest of the world that starts buying US assets that the US does not control anymore.”
If this was any other country it would be in serious trouble:
"[If a country would have even a fraction of this net international investment position, it would have the financial crisis. But this is the US. Everybody needs dollar. Everybody wants to invest in the US. So you can keep financing this in theory forever, if you keep calm, however, and this is a key argument, there are three reasons why this is not sustainable for the US."
- If the rest of the world keeps buying stuff in the US, prices will increase. And not just stocks – have you seen how much a steak costs in New York City these days. Now if you work on Wall Street that’s maybe not a problem, but for everyone else it is. The result is the middle class gets squeezed and they start to complain, hence Trump is elected in 2016 and again in 2024.
- In order to finance tax cuts for the middle class and prevent a debt crisis you have to cut costs – and a lot of the these have been aimed at international expenditure e.g. The World Health Organisation.
- Because so much money has been flowing in and the US has run a large current account deficit, its manufacturing sector has been compressed.
What does all this imply?
“It means that the US has to have a lower trade deficit, it has to improve on the manufacturing base, and it has to cut on public expenditure, which implies that, Yes, cutting aid in the rest of the world is rational. Yes, putting tariffs is rational, and yes, the value of the dollar is perfectly rational. The dollar has already been devalued by 17 per cent I think it's only the start of the process.”
So what happens next?
“Europe should rely on two main drivers of growth, internal growth from the civil market, meaning more investment into security, into the Green Deal, into integrating our energy transport network and differentiating markets away from traditional origins. Probably US tourists will keep coming to Europe, even if with the devalued dollar. But there are new areas, new countries that are super interesting.”