CHECKING IN ON THE GLOBAL ECONOMY / GEOPOLITICAL FUTURES

Checking in on the Global Economy

There are disruptions in energy, finance and trade underway that could alter the global order. 

By: Antonia Colibasanu

Let’s check in on the global economy. 

The world is struggling with inflation, even as it continues to mend broken supply chains. 

The Japanese yen, the Indian rupee, the Chinese yuan and the euro have all slid against the dollar, prompting expectations that the Federal Reserve will raise interest rates again this week.

Energy prices are particularly worrisome. 

Gasoline prices have been on an upward trend ever since the COVID-19 pandemic fundamentally changed consumption patterns, but the Russian invasion of Ukraine, and the sanctions that followed, sent prices through the roof. 

The European economy is especially beholden to Russian energy. 

Natural gas imports keep households heated and industries humming. 

The longer the war goes on, the more volatile the energy environment in Europe will be. 

(This has prompted many European states to look for other suppliers, which could create new opportunities for oil-rich states that are looking for investments in their energy sectors.)

Meanwhile, Western sanctions against Russia have prevented producers there from accessing certain technologies to extract energy resources in places such as western Siberia and to refine the extracted products. 

For now, Russia is supplying most of its clients, but as the fallout from the war and sanctions continues, its ability to do so will likely diminish. 

Less Russian oil and gas on the global market would hurt both Russia and the global economy. 

Insufficient investment worldwide in projects over the past several years has only compounded the problem.

Meanwhile, the dollar, which most of the world uses to buy oil, is growing stronger in global financial markets. 

Risk-averse investors are less interested in betting on potentially high-reward projects than they are in investing in reliable, if low-return, opportunities. 

This means less money is going into new technologies and more is being invested in consumer products. 

It also means less money is being spent on developing economies than developed economies, of which the U.S. is the safest – hence why the value of the dollar has increased by more than 10 percent since the beginning of the year compared to most world currencies.

This comes at a time when the financial system was already under pressure. 

The retirement of the baby boomers was already driving a major restructuring, with a notable shift from saving to consumption of leisure goods and health care services. 

This transition will mean lower overall spending on high-tech, innovative sectors that have driven economic growth in recent years.

At the same time, the pandemic generated mass relocations in developed countries, adding pressure on the global credit market. 

This includes not only the baby boomers but also their children, the millennials, the second-largest generation in most developed countries. 

While the boomers are looking for cheaper housing in warmer climates, millennials want affordable single-family homes for raising families. 

This is causing demand pressures on credit markets and beyond. 

The demand for dollars is only growing.

A major trade dislocation is also in progress. 

The pandemic demonstrated the negative effects of interdependence. 

Most countries have experienced supply chain problems in essential goods, such as pharmaceuticals, or temporary food supply disruptions. 

In response, most countries are looking at ways to diminish their dependencies on other countries and better integrate production chains internally. 

In short, protectionism has grown.

The U.S. is no exception. 

Presidents Donald Trump and Joe Biden followed the same script on trade, making support for American production a priority. 

The war in Ukraine further bolsters the case for protectionism, as it exposes even more vulnerabilities. 

This week, the U.S. Congress will vote on the 2022 Ocean Shipping Reform Act, the largest overhaul of shipping regulations since 1998. 

In light of the government’s desire to promote U.S. exports while reining in ocean carriers’ market power, the bill would broaden the regulatory powers of the Federal Maritime Commission and set up a legal framework for the creation of vessel alliances. 

The goal is to secure the U.S. as the primary power controlling the ocean shipping industry.

At the same time, a decades-old trend is reversing. 

Since the 1980s, firms have expanded their production abroad and developed global supply chains. 

But in response to the pandemic and Ukraine, which affected perceptions of the costs (resilience) and benefits (efficiency) of globalization, companies have started discussing reshoring or “friend-shoring.” 

Reshoring means companies relocating supply chains within their national borders, something that’s possible only for countries like the U.S. where there’s enough resource diversity to cover most needs, albeit at higher prices. 

Friend-shoring – setting up production in nearby friendly countries – is more likely, since it still promises shorter supply chains.

All these firms’ adaptation strategies involve adjustment costs and new investments. 

All will put pressure on governments to adjust and establish the necessary regulatory environments to protect their interests. 

This is one of the reasons the U.S. is revising the ocean shipping act. 

It’s why pretty much all developed states are looking to secure supplies of food, key commodities and microchips.

But more important, this means some of the globalization of the past four decades will be cut back. 

Some of these processes were already underway, and the pandemic accelerated many others. 

The war in Ukraine only amplifies the trend. 

Energy dislocation, financial dislocation, and trade and investment dislocation will alter the global economic order. 

These changes won’t happen overnight, and the actions governments will take are unclear. 

However, all this makes it more urgent for leaders to start rethinking economic models now, which in the end will affect their strategy and the global geopolitical model.