We are entering a critical point in the post-Covid phase for the world economy. The health crisis is now receding and output has been recovering, though less so in many developing nations, which have seen very slow vaccine deployment by comparison to the West.
But Covid pressures are still being felt in many developed nations too, including in the UK. Australia, but also Japan and Singapore, are experiencing periodic Covid surges. Restrictions have at times been re-imposed, even in China which (though now slowing down due to tightening of government policy towards various sectors) had initially recovered fastest from the initial pandemic hit. Overall, however, where and when rules were relaxed, the sudden upswing in demand led to serious supply problems, labour shortages and food and commodity price increases. And the path to ‘normality’ has been unequal. Some countries have already reached and exceeded pre- pandemic levels – such as China, which still managed to grow overall in 2020, and the US which had the smallest drop in the G7 last year and has since grown strongly. Others, including the UK and the EU, still have some way to go. And there is also labour inequality to deal with. OECD analysis suggests that it has been among the less skilled where most job losses occurred during the crisis.
What is more, the pace of recovery has slowed down recently and the IMF in October downgraded global growth for 2021 to 5.9% – only slightly lower than the earlier 6% expected for this year. Next year has been left unchanged at 4.9%. That is still a strong bounce-back, bringing much of the world to above pre-pandemic levels by early 2022 – though there will be some scarring for a while given the dislocation caused by the crisis.
A number of factors could derail that rather favourable picture of the world economy.
One is the shift in the economic balance which has been keenly felt in a Europe currently buffeted by the high gas prices and its overdependence on gas from Russia, which itself seems to be using the crisis to speed up approval of the Nord Stream 2 pipeline that bypasses the Ukraine. High oil prices are also once again enriching OPEC and other oil producers. This has increased the urgency for investing in more renewables, but has also led to a rethink of globalisation and the structure of international supply chains. There is now a question mark over the survival of the ’just-in-time’ manufacturing processes that have been developed over decades, as well as over the seeming overreliance on China. There have also been concerns about whether the way trade was being conducted pre-crisis still makes sense in a worsening climate change environment. The EU is proposing a carbon border adjustment mechanism to tax products that come from countries with laxer carbon emission controls.
Meanwhile, the new external economic, political and defence alliances which the UK is currently building post-Brexit are straining relations with Europe. Tensions over Taiwan between China on the one hand and the US, Canada, Australia and (to a point also) the UK on the other have heightened recently. The fall of Afghanistan to the Taliban and the US withdrawal has reignited concerns over global terrorism. Iran is still subject to numerous sanctions with the nuclear issues still unresolved. And despite some easing in the trade wars since the end of the Trump era, tariffs on a variety of traded goods and investment restrictions between the US and China and also the EU and China remain. The WTO regularly reports that non-tariff barriers are still very much in operation worldwide. At the same time a potentially unsettling race for supremacy seems to be emerging between the three main blocks – US, China, and the EU – in technology, in innovation, and also in currency domination. The EU is keenly aware that its shares have underperformed internationally in the recovery phase, and that in sectors such as tech that have shone, the EU lags seriously behind the US and China.
But there is also some good news…
Covid does seem to have shifted the stance of international organisations like the IMF and the World Bank over economic governance during the financial crisis of 2008/9 and the more persistent Eurozone crisis that followed, to almost the opposite of that. Instead of fiscal discipline they have in fact been urging countries that can do so to carry on borrowing and not withdraw stimulus measures too soon. The EU’s strict ‘Stability and Growth’ pact which constrained EU countries’ fiscal room for manoeuvre has been suspended, and is currently under review. And the EU has just started issuing its first green bonds which effectively mutualise that debt across all countries in the EU – something that would have been unheard of a decade ago.
The European Central Bank, alongside others such as the US Federal Reserve and the UK’s Bank of England, have been actively helping to finance and support that borrowing by injecting huge quantities of extra liquidity into the system and by slashing interest rates to record lows. It was of course always clear that this would eventually lead to higher inflation, but the immediate danger then was deflation becoming embedded in the system.
In other areas, interestingly and against expectations, the UK’s exit from the EU has if anything accelerated moves by the block to push for greater unity across a wide spectrum of activities including in the areas of energy, capital markets, digitalisation, banking, and climate change.
We have also seen widespread use of e-commerce, new ways of communicating and doing business, acceptability of different patterns of work that allow greater flexibility, increased use of AI, and faster approval processes in life sciences that have speeded up the medical research and advances that have brought us vaccines. And although there are accusations of ‘greenwashing’ in the reporting of companies’ impacts, the recent sharp rise in funds allocated to environmental, social and governance investments (ESG) must be good news. Also, after decades of little success, an agreement has finally been forged, in principle at least, among the G7, the G20 and now the over 130 OECD member nations on a global minimum 15% corporate tax rate for multinationals and a fairer distribution of profits among the countries where the revenues in fact occur.
The G7 summit in Cornwall and COP26 in Glasgow also saw renewed appreciation of the scale of the investment required now to avert environmental and climate catastrophe despite the absence of Presidents Putin and Xi. The US under President Biden is once again re-engaged. But what recent energy price increases have shown is also that the cost of transition to Net Zero should not be underestimated – for energy-intensive sectors in particular, but also to households and consumers.
Trade and Brexit
Finally, the resilience of trade is one of the surprising elements of the pandemic. Early forecasts by the World Trade Organisation suggested that world trade could fall by somewhere between 13% and 33% in 2020. In fact, it only fell by just over 5%, and is now forecast to grow by a healthy 10.8% in 2021 – followed by a further 4.7% in 2022.
However, the pace of recovery in demand is currently still exceeding the ability of supply to respond quickly enough and for goods to be transported and reach their destination speedily and efficiently. Rates of inflation are way above many central banks’ 2% target – over 5% in the US and over 3% in the UK and the Eurozone. Oil, gas, electricity, and petrol prices remain at elevated levels. For the UK in particular the OECD anticipates that because of Brexit, the inflationary and supply pressures will be more persistent here than in other comparable countries in Europe. And trade with the EU has suffered amidst new bureaucracy and rising costs.
The IMF, while urging vigilance, nevertheless believes that inflation will slow down through 2022 as supply finally gears up. But countries may well react in the meantime by hiking interest rates, constraining spending, and raising taxes – some of which has already started to happen. If not done with care the pace of recovery may well slow down at a time when Covid remains very much a threat to many countries’ revival hopes.
UPCOMING PARC AND CRF EVENT
Geopolitical and Global Trade Outlook Briefing:
Online, with Vicky Pryce, 26 January 2022
This article formed part of the HR Directors’ Briefing: Scanning the Horizon: Trends and Issues in 2022. View the full Briefing here.