The representation of macroeconomics is turned upside down.
The Great Moderation characterized by low volatility in growth and inflation is a thing of the past. The world is suffering the consequences of competitive technological dynamics, economic policy shocks and the departure from a sustainable political equilibrium.
Two levels of analysis are necessary to understand macroeconomic phenomena.
The first level is the one that is usually referred to. However, the associated framework is no longer the one that prevailed during the great moderation. The cooperative and coordinated dimension has had its day and the opening to the world has been succeeded by the desire for a more regional, more local policy.
But the nature of the cycle is no longer the same either. The technological dynamic is no longer simply distributed by the USA, Chinese competition provokes a new confrontation.
The income that Americans drew from their technological advance is being called into question.
It is in this context that the tariff policies of the Trump administration must be analyzed. They are based on a balance of power that is no longer the multilateral framework of before.
The combination of these elements will inevitably result in reallocations of resources and greater volatility in macroeconomic indicators. The rules are different and are not applied everywhere in the same way. This will result in friction and adjustments that can sometimes be violent.
The second level is conditioned by the change in the political balance of the world. The position taken by Donald Trump on Europe and a world conditioned by autocratic powers force us to rethink the priorities and hierarchy of economic policies.
In such a regime, the options taken and the choices made can be brutal and rapid. We see this with the European awareness concerning military spending. Since NATO is no longer as reliable, Europeans must arm themselves to maintain their autonomy. This then results in an allocation of resources in favor of the military, but also in favor of decarbonized energies less dependent on supplies from the rest of the world. Therefore, the need to increase spending translates into the need to reduce others. And the obligation to revisit the social model, particularly in Europe.
The political shocks and the resulting consequences will have major macroeconomic impacts and significant volatility risks due to the abruptness of the disruptions.
The volatility of macroeconomic indicators will be the composite of these two levels of analysis of the macroeconomy. The risk components will not be in phase. The dynamics may be complex to read.
It will be even more so since the risks to the climate are increasing, with the number of climatic events increasing.