The awaiting challenges for the Global Economy
With the outbreak of war in Ukraine, everything changed in expectations for the global economy.
This was supposed to be the year of recovery from the Covid-19 shock. By the end of 2023–2024, analysts expected — despite strong slowing forces dominating the international environment — that the U.S., European, and Chinese economies would recover significantly, although warning the progress won’t see major developed economies returning to pre-pandemic levels, fueled by current and potentially rising geopolitical issues and the yet looming danger of Covid-19 upon our societies.
Other emerging economies were lagging behind, but they also expected rapid growth and a slow return to normal.
All of these estimates have now evaporated, with inflation on the horizon becoming higher and longer lasting.
The global economy faces at least 3 critical challenges — which appear to be the most direct in relation to the current situation: stagflation, new refugees in Europe and soaring contagion in China (with threat of lockdown).
Let’s examine them in detail.
Stalling economy growth & high inflation: a worrisome scenario
The Russian invasion of Ukraine is imposing a severe STAGFLATION shock:
prices are rising as energy supply is threatened and household and business incomes are squeezed as essential goods become more expensive.
Around the world, policymakers have taken action and moved toward a gloomier outlook. Just over a month ago, Christine Lagarde, ECB president, presented an optimistic view of the Eurozone outlook, predicting that growth should rebound strongly, but this week she changed her mind, saying recent events “posed significant risks to growth.”
Concerned about soaring inflation in the U.S., Federal Reserve Chairman Jerome Powell initiated a series of interest rate hikes, saying he is
“acutely aware of the need to return the economy to price stability and determined to use our tools to do exactly that.”
China’s top economic official, Liu He, was sufficiently concerned about the situation to make a rare intervention on Wednesday, promising that the government would stimulate the economy in the first quarter, as well as introduce market-friendly policies.
The alarm for everyone is stagflation.
Sluggish growth and higher prices are the big risks.
Global supply chains have already been heavily disrupted by the pandemic and bottlenecks, but the war in Ukraine presents a new alert for the supply of key materials.
For example, Kiev supplies 70 percent of neon gas, which is needed for the laser lithography process used to produce semiconductors, while Russia is the leading exporter of palladium, which is needed to make catalytic converters.
And why not mentioning wheat — which sees Ukraine & Russia accounting for more than 30% of the world production of the precious commodity; a disruption which has already seen food prices spiking in many markets internationally.
Disruptions in supplies from these countries, which are crucial for gas and grain, will provide the impetus for inflation and a severe shortage.
While there were hopes that the European economy could grow faster than the U.S. in 2022, few now think that is likely.
Vitor Constâncio, the former vice president of the ECB, warns that a recession is possible, regardless of what happens during the war, if confidence is lost.
“With quantitative shortfalls, growth could fall even further and maybe even turn negative this year, because we would have a panic, with savings rising and demand stuck.”
Translated: stagflation scenarios, especially in Europe.
Humanitarian Crisis knocking at Europe’s door
Focusing solely on the war, the old continent has another challenge to combat: the flow of Ukrainian refugees.
With the largest war on European soil in nearly 80 years, the threat of escalation is forcing Europe to deal with an even larger influx of refugees than in 2015.
The trend was already severe and the current Ukrainian conflict has only accelerated a process which still lack a common policy framework by the members of the Union. It is forecasted that, by 2080, the population of Europe will have increased of 121 million new individuals — a net increase of 16% in relation to the current population — relative to what the continent’s population would be then without any immigration.
The result will be a Europe that is substantially more diverse than it is today.
But also significantly huge economic burdens on the current health care system, education system, criminal justice system, the environment and infrastructure & public safety. A whole infrastructure change will need to be undertaken and/or improved dramatically to mitigate the effect of this tidal wave of humanitarian crisis.
This is a sensitive issue, especially involving countries like Poland, already reticent in their reception, and one that will certainly take a toll on Europe’s ability to manage a multi-pronged crisis.
A yet very active threat: the Covid-19 nightmare
As if the war were not enough to darken the horizon, Covid is making a threatening comeback. Especially in China.
The return of the coronavirus in the dragon is once again threatening global supply chains, amplifying upward pressure on prices and downward pressure on production.
The wave of Chinese Omicron has re-proposed the hypothesis of extending blockades in large areas of the country, just when the global economy is in trouble and China itself is looking for internal economic stability.
What to expect ahead?
One hard truth we have so dearly learnt was that society was unprepared towards the pandemic: an awareness which erased many of the so highly considered ‘certainties’ in both constant growth and resilience of our system ; these abrupted changes have profoundly shook the public confidence in institutions and governments alike, culminating in restriction of freedom across the board and severe hardship — fueling an ongoing narrative of uprising social unrest.
Disruption have now brought regulators and entrepreneurs back at the table to think processes in a more holistically way and hopefully aiming to create an infrastructure pointed at sustainability & resilience rather than scalability and efficiency.
Time will tell if our choices and actions were right but, for the time being, one can only speculate what the world will look like in a year from now.
Undoubtedly it will be a much different one that we left behind in 2019.
For updates & the latest news and analysis — follow me on Twitter @FilandroMi
Extra Resources:
- Link to the statement on ECB website:
https://www.ecb.europa.eu/press/pressconf/2022/html/ecb.is220310~1bc8c1b1ca.en.html - Inflation: the creeping enemy of wealth.
https://medium.com/the-capital/the-spectre-of-inflation-770f9ef8369d - Witnessing the End of Globalization:
https://medium.com/coinmonks/the-turning-tide-for-globalization-4da1fc591ea9 - EU migration statistics by Eurostat:
https://ec.europa.eu/eurostat/statistics-explained/index.php?title=Migration_and_migrant_population_statistics - Figures of Immigrants in European Society — source European Commission:
https://ec.europa.eu/info/strategy/priorities-2019-2024/promoting-our-european-way-life/statistics-migration-europe_en - The Long-Term Growth Impact of Refugee Migration in Europe: A Case Study — by Gerrit Manthei
https://www.intereconomics.eu/contents/year/2021/number/1/article/the-long-term-growth-impact-of-refugee-migration-in-europe-a-case-study.html
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