'Global economy not set up to navigate low-carbon transition'
Global efforts to move away from carbon intensive technologies and boost green energy usage are likely to lead to higher inflationary pressures in the medium term.
Meanwhile, technological breakthroughs in areas such as artificial intelligence (AI), are fuelling even higher demand for energy.
“The global economy is not set up to navigate the low-carbon transition. There will be friction and since supply is not readily available, it will bring in inflation when demand emerges,” Wei Li, global chief investment strategist, BlackRock, told AsianInvestor.
The transition to a low-carbon economy – one of the five mega forces that BlackRock believes will drive investment trends over the nexte decade – is set to spur a massive reallocation of capital as energy systems are rewired.
BlackRock
It also holds implications for inflation and monetary policy, according to central banks.
“Raising the price of carbon-intensive goods and services relative to the price of other goods and services could send a dissuasive signal to consumers and encourage substitution of these products by low-carbon, low-greenhouse-gas-emitting alternatives. However, it could also lead to more inflation,” Stephane Dees, head of climate economics at Banque de Francesaid in a May 7 post on the Official Monetary and Financial Institutions Forum's website.
“This phenomenon, known as ‘green inflation’ or ‘greenflation’, reflects the difficulty of redirecting resources towards sustainable activities in the short and medium term, but also the persistent effect on inflation expectations of successive energy price shocks.
"While climate transition-related factors currently play a limited role in inflationary pressures, in the future, transition policies could be a source of significant macroeconomic shocks.”
HIGHER FOR LONGER
BlackRock’s Li noted that overall, the global economy is heading for a regime of structurally higher inflation than before, in part because some of the mega forces it has identified indicate supply constraints.
BlackRock’s five mega forces are demographic divergence, digital disruption and artificial intelligence, a fragmenting world, future of finance, and low carbon transition.
Ageing populations in major economies, for instance, are poised to limit how much countries can produce and grow, although some others like India and Indonesia are poised to gain from still-growing young populations.
Similarly, geopolitical fragmentation, another megaforce, is also inflationary in nature, noted Li.
“Friendshoring [relocation of supply chains in countries regarded as political allies], reshoring [relocation of production from offshore sites to the home country] and duplication of supply chains, are about moving from cost efficiency to resiliency. All of this is inflationary.”
The global economy is in a different inflationary environment compared to before the pandemic, Li said.
“The pandemic was inflationary because all of a sudden, supply couldn’t reach where demand was emerging, leading to inflationary pressures and as we got out of the pandemic, the goods component became deflationary. Once goods prices stop falling, inflation could rollercoaster back up a little,” she added.
“We do see the global economy entering a regime of structurally higher inflation compared to before."
Image credit: Shutterstock
ESCALATING ENERGY NEEDS
Efforts to transition to low-carbon emitting technologies also come at a time when demand for energy is escalating because of technological breakthroughs in artificial intelligence.
The rapid growth of AI and the consequent demand for infrastructure is still an underappreciated concept in the context of energy transition, Li said.
“The early beneficiaries of technology and AI are the magnificent seven [stocks]. But we are also increasingly interested in the secondary beneficiaries of AI. So that could be data centres, for example, and the energy needs for powering AI is likely to result in major infrastructure spending,” Li said.
The obvious beneficiaries are chips and semiconductors but it is broadening to data centres and energy and infrastructure spending, she said.
Data centre providers in Asia are already scrambling to meet escalating demand for AI infrastructure and services.
Singapore-based ST Telemedia Global Data Centres (STT GDC), on May 30 announced its data centres across Southeast Asia are ready to meet AI demands.
The data centre provider -- with a footprint across Southeast Asia, including Singapore, Malaysia, Thailand, Indonesia, the Philippines and Vietnam -- has more than 500 megawatts of data centre capacity, both operational and under construction.
AI-specialised data centres look different than conventional facilities and may require operators to plan, design and allocate power resources based on the type of data processed or stage of generative AI development, a JLL report issued in February 2024 said.
As the amount of computing equipment installed and operated is expected to continue increasing with AI demand, heat generation will surpass current standards, the report said.
Data centre operators are exploring alternative power sourcing strategies for onsite power generation including small modular reactors (SMRs), hydrogen fuel cells and natural gas.
"To support these requirements, critical changes need to be made worldwide to increase power usage,” the JLL report noted.
Current estimates show that the power demand of data centres will increase by more than 150% by the end the decade, putting pressure on energy supply.
"We believe investments into better infrastructure, smarter energy grids, and, most importantly, renewables are key to ensuring the sustainable development of AI," Tomomi Shimada, lead APAC sustainable investing strategist at JP Morgan Asset Management, told AsianInvestor.