The World Economic Forum’s Community of Chief Economists expects lower economic activity, higher inflation, lower real wages and greater food insecurity globally in 2022, pointing to the devastating human consequences of the fragmentation of the global economy.
Reversing previous expectations for recovery, the majority of respondents to the latest survey expect only a moderate economic outlook in the United States, China, Latin America, South Asia and Pacific, East Asia, sub-Saharan Africa and the Middle East and North Africa in 2022. In Europe, the majority expect the economic outlook to be weak.
The choices of both business and government are expected to lead to greater fragmentation in the global economy and unprecedented shifts in supply chains, creating a perfect storm of volatility and uncertainty. These patterns are expected to create further difficult trade-offs and choices for policy-makers, and – without greater coordination – shocking human costs. These are the key findings of the World Economic Forum’s quarterly Chief Economists Outlook, published today.
“We are at the cusp of a vicious cycle that could impact societies for years. The pandemic and war in Ukraine have fragmented the global economy and created far-reaching consequences that risk wiping out the gains of the last 30 years. Leaders face difficult choices and trade-offs domestically when it comes to debt, inflation and investment. Yet business and government leaders must also recognise the absolute necessity of global cooperation to prevent economic misery and hunger for millions around the world. The World Economic Forum’s Annual Meeting this week will provide a starting point for such collaboration”, says Saadia Zahidi, Managing Director at the World Economic Forum.
Higher inflation, lower real wages and food insecurity
The war in Ukraine, continued surges of COVID-19 variants and associated supply shocks are impacting expectations on inflation. The majority of chief economists surveyed by the Forum expect high or very high inflation in 2022 in all markets except China and East Asia – with 96% expecting high or very high inflation in the US, 92% for Europe and 86% for Latin America. In parallel, two-thirds of chief economists expect that average real wages will decline in the near term in advanced economies, while one-third are uncertain. Ninety percent of those surveyed expect average real wages to fall across low-income economies.
With wheat prices expected to increase by over 40% this year and prices for vegetable oils, cereals and meat at all-time highs, the war in Ukraine is exacerbating global hunger and a cost-of-living crisis. Over the next three years, chief economists expect food insecurity to be most severe in sub-Saharan Africa and in the Middle East and North Africa. At the current trajectory, the world is on track for the worst food crisis in recent history, compounded by the additional pressure of high energy prices.
These expert predictions are echoed in the experience of the general public. A recent 11-country survey, conducted by Ipsos with the World Economic Forum, reveals high levels of public economic pessimism in the face of a cost-of-living crisis. Twenty-five per cent of the public say they are finding it quite or very difficult to manage financially, ranging between two-thirds of Turkish citizens and 16% of those in the US and Germany. The largest group (34%) say they are “just about getting by”. Only 11% say they are living comfortably while three in ten (29%) feel they are doing alright.
Expectations of price rises are also widespread across all 11 countries – almost four in five people expect the cost of their food shopping to increase, while three-quarters expect rises in utility bills such as gas and electricity. For most countries, a rise in food prices is the area households say would have the biggest impact on their quality of life – this is the case for the US, Canada, Italy, Japan, Australia, Poland and Turkey. In the remaining four countries (Britain, Italy, Germany and Spain) an increase in utility bills would have the biggest effect.
A difficult balancing act for policy-makers
Faced with the challenge of containing inflation without tipping economies into recession, chief economists are divided. While a majority (57%) agree that the risks associated with higher inflation in low-income economies outweigh those associated with short-term contraction due to monetary tightening, opinions of the effects in high-income countries are more divided.
With fiscal spending set to increase in many countries to deal with current developments, balancing the risks of a cost-of-living crisis with higher debt is a key challenge for policy-makers. In advanced economies, 54% of chief economists expect energy price subsidies while 41% expect food price subsidies. In low-income economies the vast majority feel that food price subsidies will be necessary (86%), while 62% expect energy price subsidies. However, this necessity will need to be squared against a higher risk of debt default (81% see an increased risk of this for developing economies).
With the World Bank expecting energy prices to rise by more than 50% in 2022, before easing in 2023-24, policy-makers are faced with balancing the risks of energy insecurity against the transition to greener energy. Most chief economists surveyed expect policy-makers to try and tackle both challenges simultaneously. However, a clear majority of respondents expect a prioritization of energy security based on carbon-intensive sources rather than greener sources across all regions except Europe and China.
Fragmentation and politicization of supply chains
As supply chains enter their third year of disruption, governments and business are rethinking their approach to exposure, self-sufficiency and security across their supply chains. Chief economists consider it likely or highly likely that multinational companies will both localize and diversify their supply chains in the next three years, realigning them along geopolitical fault lines.
The November 2021 edition of the Chief Economists Outlook identified “deglobalization” as an emerging trend driven by the impact of the pandemic. The war in Ukraine and its geopolitical and economic fallout is accelerating these trends, with declining physical integration and increasing friction in the virtual space. A majority of the chief economists polled for May’s Outlook expect higher fragmentation in the markets for goods, technology and labour in the next three years, while most expect services to remain stable or be more globalized.
Four futures for economic globalization
An additional World Economic Forum report, published today, maps out possible trajectories for globalization in the coming five years. Four Futures for Economic Globalization: Scenarios and Their Implications outlines how the nature of globalization may shift as economic powers choose between fragmentation or integration in both the physical and virtual dimensions of the world economy. The four scenarios are as follows:
Globalization 5.0: Reconnection describes physical and virtual integration – a new form of globalization that couples integration with stronger national safety nets and alignment on global frameworks for tax and technology.
Analogue Networks: Virtual Nationalism describes physical integration and virtual fragmentation – a potential future in which trade, especially in strategic commodities, is secured but a tech race, cybersecurity concerns and uncoordinated regulation lead to virtual disintegration.
Digital Dominance: Agile Platforms describes physical fragmentation and virtual integration, as the physical movement of goods and people regresses and large global platforms dominate global economic activity.
Autarkic World: Systemic Fragmentation describes both physical and virtual fragmentation relative to today, as leaders turn inwards and seek to exert greater control over production, services, people and technology.
The report calls for “no-regret actions” by policy-makers such as: global cooperation on the climate crisis; investment in human capital to prepare populations for a range of economic futures; and developing resilience through greater economic integration, knowledge-sharing and diversification.
Potanin’s core business unfazed by personal sanctions
The news agencies’ report that Vladimir Potanin the president of MMC Norilsk Nickel PJSC was first mentioned in the UK government’s restrictive measures caused an immediate increase in the price of metals used by electric car production clusters around the world and, as a consequence, worries about the labor market.
Great Britain on Wednesday announced sanctions against Potanin, news agencies reported.
Potanin, known as Russia’s “Nickel King”, was included in the latest wave of sanctions by Britain which included entrepreneurs, banks and other entities.
Potanin is one of Russia’s richest people, although his net worth depends largely on the value of his stake in Nornickel, the world’s largest producer of palladium and refined nickel.
Bloomberg reports that, palladium rose as much as 7.7% on the news, while nickel prices jumped 9.2% before paring gains.
The turnover of Norilsk Nickel in finnish Harjavalta last year amounted to about 1.2 billion euros, and the raw materials it processes come mainly from Russia, according to the Finnish business outlet Kauppalehti.
The Harjavalta Refinery is the main reason why the value of Russian nickel imports to Finland has outstripped oil imports, according to the Finnish customs data.
At Harjavalta, Norilsk Nickel produces about 5% of the world’s pure nickel supply.
In Finland, Norilsk Nickel is closely linked to the industrial center of Harjavalta, which employs a total of 1,000 people. Nornickel Harjavalta employs about 300 people.
If the EU and the US follow the UK’s lead, Nornickel could face a production freeze and nickel prices could soar. This, in turn, jeopardizes EU’s planned investments in battery factories, according to Kauppalehti.
As explained by the law firm Neuschwil and Bayer, unlike US sanctions, British sanctions apply to companies only if the sanctioned person owns 50 percent of its shares or over.
The other two big shareholders of the Russian nickel giant, Oleg Deripaska and Roman Abramovich, are under UK and US sanctions, and together with Potanin, their combined stake exceeds 50 percent.
As Neuschwil and Bayer explained, as long as only Potanin is involved in the operational management of Norilsk Nickel, there is no risk of sanctions for the company, even if other countries introduce sanctions against Potanin.
Uganda Can Rein in Debt by Managing its Public Investments Better
In the wake of a waning COVID-19 (coronavirus) pandemic and upon full re-opening of the economy, optimism—regarding expected acceleration of growth and a clearer outlook for oil production with the signing of the Final Investment Decision in February 2022—has been dampened by new global shocks, including the impacts of the war in Ukraine.
The 19th edition of the Uganda Economic Update (UEU): Fiscal Sustainability through Deeper Reform of Public Investment Management, a biannual analysis of Uganda’s near-term macroeconomic outlook, estimates growth at 3.7 percent in 2022, which is lower than pre-COVID-19 projections of over 6 percent. Uganda’s gross national income per capita stood at about $840 in FY21 and has increased only marginally in the year since.
Real gross domestic product grew by 4.3 percent in the first half of 2022 supported by a strong and speedy recovery of the service sector upon the opening of the leisure and entertainment industry, accommodation, and food services, as well as sustained buoyancy of the information and communications sector. The report projects a 5.1 percent growth rate in FY23, 0.5 percentage point below the December 2021 forecast, increasing to about 6 percent in FY24.
“Rising commodity prices and the overall increase in cost of living pose new risks to livelihoods, that had just begun recovering from the effects of COVID-19. These and other shocks are threatening to stall socio-economic transformation, thus increasing the likelihood of the people falling deeper into poverty,” said Mukami Kariuki, World Bank Country Manager for Uganda. “It is therefore crucial for the Government of Uganda to adopt targeted interventions to support the vulnerable while managing debt and rising inflation.”
The UEU proposes four policy actions that will enable Uganda to sustain a resilient and inclusive recovery: i) accelerate vaccination efforts against COVID-19; ii) adopt targeted interventions to support the vulnerable – such as building shock responsive social protection systems; iii) maintain prudent fiscal and debt management to support the fiscal consolidation agenda; and iv) cautious monetary tightening in the face of rising inflationary pressures.
The report also recommends accelerating longer term structural reforms to (i) strengthen revenue mobilization through the implementation of the Domestic Revenue Mobilization Strategy; (ii) improve public investment management; (iii) rationalize public expenditure to support faster, sustainable, and inclusive growth by investing strongly in human capital development; and (iv) improve the trade and business environment and enable green investments.
The UEU notes that fiscal consolidation is needed to rein in debt and to create the necessary space to respond to shocks that could hurt or stall recovery. This can be done through better Public Investment Management (PIM) building on important reforms that have been undertaken by the government. The benefits of these efforts are starting to show.
“Uganda has a great opportunity to harness Public Investment Management by making sure that beyond preparing good projects, effort is also directed at ensuring that they are efficiently funded, implemented, monitored, operated, maintained, and evaluated. These steps ensure that the country can reap the maximum value of public investments,” said Rachel Sebudde, World Bank Senior Economist and the lead author of the Uganda Economic Update. “Strategic capacity building for government officials is crucial as it will improve the Ministries, Departments and Agencies’ effectiveness across the PIM cycle.”
Notwithstanding the progress achieved in the PIM process, key challenges remain. These include low execution rates on donor and own-budget projects; long implementation delays; cost- and time-overruns on projects; and high commitment fees in the case of non-concessional externally funded projects. Overall, the improvements around the administrative processes of the pre-investment phase of PIM are being discounted by challenges in critical areas, including project prioritization and selection, budgeting, and implementation.
Cambodia’s Economy Growing but Must Weather Oil Price Shock
Cambodia’s economy will grow by 4.5 percent in 2022, according to the latest World Bank projections. Weathering the Oil Price Shock, the Bank’s June 2022 economic update for Cambodia, shows that while domestic economic activity and goods exports continue to recover from the slowdown caused by COVID-19, growth remains uneven, with the war in Ukraine driving inflation.
The report shows that during the first quarter of 2022, goods exports rose to $4.8 billion, up by 26 percent on last year. Traditional growth drivers, especially garments, travel goods, and footwear continue to expand but newer manufacturing industries, such as for electrical and vehicle parts, are also emerging, while exports to the US are surging.
Although domestic economic momentum is strong, recovery is held back by deteriorating global demand. Rising global energy and food prices are fueling higher inflation, and in Cambodia, poor and vulnerable households with limited savings are likely to bear the brunt of the oil price shock. The fiscal deficit is expected to widen to 6.3 percent of GDP, as the government will need to continue spending programs to support the poor.
“The government’s Living with COVID-19 strategy has allowed Cambodia to reopen, enabling economic recovery,” said Maryam Salim, World Bank Country Manager for Cambodia. “However, the road ahead remains unclear. Rising energy and food prices due to the war in Ukraine are imposing additional burdens on the poor, and this will slow the pace of poverty reduction. The government’s cash transfer program, which has been vital to poor households during the pandemic, will continue to be needed.”
Over the medium term, the economy is expected to grow at around 6 percent annually, with the new investment law, together with free trade agreements, helping to boost investment and trade. The report recommends policies that can help sustain economic recovery. These include continued efforts to contain COVID-19 infection, strengthening consumer and investor confidence, promotion of exports, particularly in agricultural commodities, by facilitating trade and reducing the costs of doing business, and stabilization of retail prices.
The report also includes a special focus section on post-pandemic supply chain disruptions. It suggests strategies for reducing logistic costs and emphasizes that efforts to increase Cambodia’s trade competitiveness and enhance its connectivity will require a systematic approach that goes beyond improvement of physical assets. Efforts are needed to strengthen the entire supply chain by monitoring the efficiency of trade gateways and routes, expanding the “Best Trader scheme” to the wider logistics sector, developing a longer-term business plan for railways, and establishing the “Roadwatch,” hotline, through which traders and citizens can report irregularities. Implementing these reforms will require an institutional approach and a lead government agency that can oversee logistics development at the national and gateway levels.
The Cambodia Economic Update is a biannual report that provides up-to-date information on short- and medium-term macroeconomic developments in Cambodia.
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