Global Economy: Balancing in the Storm

A perfect storm – this is how, according to WEF experts, the current geo–economic situation in the world can be characterized. Instead of recovering from the COVID-19 pandemic, the world economy is facing new shocks that could lead to a decline in economic growth, accelerated inflation, energy and food crises.

The prospects of the world economy were assessed by experts in their new report.

The opening part of the document contains updated data on economic growth forecasts for 2022 according to the International Monetary Fund. Economic growth is expected to decline by 6.1%. The determining factors of economic development this year are the armed conflict in Europe, tightening monetary policy and financial market volatility, fiscal withdrawal, China’s slowdown, and pandemic vaccine access.

This year, the world economy will be mainly affected by the Russian-Ukrainian crisis and its consequences. Despite the fact that the combined economies of the two main parties to the conflict account for only 2% of world GDP, it is important to understand that these countries occupy leading positions in some narrow areas of world trade. 30% of wheat, 20% of corn, mineral fertilizers and natural gas, as well as 11% of oil reserves come to the world market from these two countries.

The events taking place in Europe will have a direct impact on the countries of the region, economic growth in the Euro zone will decrease to 2.8%. The food crisis will affect the countries of the Middle East and Africa, at the same time, oil-exporting countries can benefit from higher energy prices, and the average growth in the regions will be up to 4.6% and 3.8%, respectively.

In Asia, the situation is somewhat different, but there is the same tendency to decrease the pace of economic development by 0.5% to 5.4%. In this case, the decline in the region is mostly caused by the dependence on the Chinese economy, which has been weakened by new COVID outbreaks and strict quarantine measures. In the US, a decline of 0.3 percentage points to 3.7% is forecast as a result of a faster tightening of monetary policy in response to the acceleration of inflation, in Latin America growth will be 2.5%.

The experts of the Davos Forum shared their expectations regarding changes in wages and inflation, food security, the activities of international corporations, global integration, the impact of anti-Russian sanctions and the future role of the US dollar in the global economy.

According to the authors of the report, inflation will become a problem for all regions, but it will mainly affect the development of the economy in the United States, Europe and Latin America; China and the Asia-Pacific region will be least affected by it. The increase in inflationary pressure is associated with renewed disruptions in supply chains caused by the armed conflict and the wave of sanctions that followed it. Experts agreed on the dynamics of changes in wages – it is assumed that a decrease should be expected in all regions.

As noted earlier, energy and food markets will be most affected by the consequences of the Ukrainian crisis. The latter factor causes serious concerns about the rising cost of living and the impending risk of hunger. In 2020, 36 countries imported more than 50% of their wheat from Russia or Ukraine. In March 2022, the Food and Agriculture Organization's Food Price Index leapt to its highest level since the organization's creation in 1990. And this is not the limit: according to forecasts, wheat prices will reach a historic maximum due to an increase of more than 40% this year.

Ensuring food security will become a priority in the countries of Africa and the Middle East due to their high import dependence in terms of food supply. The high burden on the national budgets of the countries of these regions will be due to attempts to maintain the availability of food through state subsidies. The countries of Europe, the USA, as well as China, states of East Asia, the Asia-Pacific Region and Latin America will be less sensitive to food security risks and will be able to partially compensate for them through subsidies.

However, in addition to the direct threat of a food crisis, experts also identify an indirect influence, and give the following example:

“As the world’s largest producer of soya beans, Brazil imports about half of its potash fertilizer from Ukraine and Russia. China then imports soya beans from Brazil to feed its livestock, which could affect the price of meat in China and around the world”.

Protectionism and export restrictions may also result from a reduction in food supplies.

Another trend in the development of the global economy, according to experts, will be localization, diversification and politicization of supply chains. The prerequisites for the emergence of this trend were Brexit, the impact of the pandemic and the geopolitical situation in the world. Against the background of these events, governments and business circles have concerns about dependence on global processes, and therefore approaches to openness, self-sufficiency and security in trade and industrial relations are being revised. Economists assume that the restructuring of supply chains will be completed in the next three years, priorities during this period will shift from ensuring the efficiency of chains to strengthening their sustainability.

The rollback of globalization will also have an impact on the development of the world economy in 2022. WEF experts expect that in the coming years, the markets of goods, labor and technology will be fragmented, while the services market will be least affected by this trend.

The sanctions imposed on Russia also have a long-lasting effect. At the time of writing the report, Russia has already withstood the first wave, and despite partial isolation, freezing of foreign exchange reserves, the departure of investors and businesses from the country, the Russian economy has recovered with a number of reservations. In the long term, experts predict a decline in Russia's GDP growth by 8.5-10% in 2022 and a general slowdown in economic development for years to come. At the same time, experts predict a rapprochement between Russia and China, which may affect the structure of the global economy.

The report also raises the question of the future status of the US dollar. After the introduction of sanctions against Russia, there was a precedent for freezing the dollar assets of the central bank of a sovereign country. This was perceived by a number of experts as an attempt of weaponization of the currency, which could undermine the trust in the dollar as a reserve currency in the future. Despite this, WEF experts believe that nothing threatens the dollar in the short term, as it continues to show growth under the influence of tightening US monetary policy and rising interest rates.

In the fight against the consequences of the ongoing transformations of the world economy, risks are also hidden, and therefore decisions taken by governments should be balanced taking into account the interests of their state and the state of the economy. The fight against inflation is fraught for developed economies with excessive tightening of monetary policy, the damage from which may exceed the negative effect of inflation, at the same time, the experts find such a solution as the most optimal for developing countries.

Regarding the strengthening of food and energy security, priorities for countries also differ depending on the development of their economies. Developing countries should focus subsidies on providing affordable food to the population, while developed countries should focus on the energy sector.

Balancing between solving internal problems and global issues has also become more complicated given the current situation. WEF experts warn of the growth of economic nationalism, which may lead to a departure from economic integration and cancel out long-term progress in achieving long-term goals of humanity, such as preventing climate change or combating inequality. Under the circumstances, the authors of the report urge world leaders to keep a level head in their decisions and focus on the long-term perspective, realizing the far-reaching global consequences.

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