In 2021, the global economy, including emerging and developing economies, barely recovered from the recession caused by the pandemic. Prior to the illegal escalation of Russian troops into the territory of the independent state of Ukraine, most analysts expected a steady recovery trend in 2022. But what does the situation with the global financial market look like now? Today we will consider a number of factors that can not only hinder economic growth but also collapse it completely, forcing all of humanity to build a new global financial ecosystem. So, let's start our analysis of economic risks from pre-pandemic trends.
In This Article:
Analysis of the Global Economy in 2021
Despite the severe impact of the Covid-19 pandemic, the global economy largely avoided recession in 2021 and recovered quickly. However, due to the emergence of new strains of coronavirus Delta and Omicron and the resulting consequences such as disruption of the supply chain and inflation, the recovery of the global economy remains unstable and uneven.
At the beginning of 2021, a number of countries around the world decided to create global cooperation and open their borders to restore almost all economic activity. This cooperation is in accordance with the new ''Flexible adaptation'' pandemic strategy based on increased vaccination coverage of the population. According to IHS Markit, in the second quarter of 2021, global GDP exceeded the fourth quarter of 2019, i.e., pre-pandemic. This means that the economy is moving from recovery to global growth. In the July 2021 World Economic Outlook report, the IMF and the World Bank said the global economy will emerge from recession and grow at ''the fastest pace in 80 years.''
The development progress of the world economy is mainly due to the US, China, and the EU. In particular, the launch of large economic stimulus packages and rapid vaccination coverage helped the world's largest economy, the United States, increase the country's GDP growth rate in the second quarter of 2021 to the highest level compared to the same period in the last 70 years. According to the Organization for Economic Co-operation and Development (OECD), US GDP growth in 2021 could reach 6%. The developing countries' economy is also estimated to be recovering faster than expected. According to forecasts, the growth of the EU economy can reach 5%. Thanks to the effective control of the epidemic, China continues to experience stable growth, and the government of this country predicts that the country's GDP growth in 2021 will exceed the target of 6%. According to the OECD forecast, the growth rate of the world's second economy will be 8.5%.
The pace of recovery slowed in the final months of the year as new security challenges of the pandemic forced many countries to shelve their plans to reopen borders. However, it can be said that, in general, significant changes have taken place in the global economy. In addition to the IMF forecast, the World Trade Organization (WTO) predicts global growth of 10.7% in 2022, in stark contrast to a contraction of up to 8% in 2021.
Problems and Prospects
With the emergence of new strains of the Sars-CoV-2 virus, especially the Omicron strain at the end of 2021, supply chain disruption, and inflation soaring, many challenges need to be addressed to restore and develop the global economy.
First of all, this is the uneven pace of recovery and growth of the advanced economies. Bruce Kasman, the chief economist at US bank JPMorgan, said that this is ''the biggest gap in the last 20-25 years. All reports from international organizations emphasize that the gap in the speed of recovery is mainly related to the level of vaccination coverage. As of early December, 55% of the world's population had received at least one dose of the vaccine, according to statistics from Our World in Data, but this figure is only 6.2% in low-income countries, posing a risk of new coronavirus outbreaks.
War in Ukraine and the Global Economy
The Russian-Ukrainian conflict, which could escalate into Europe's largest since World War II, has shattered hopes for a post-coronavirus global economic recovery. Nouriel Roubini, nicknamed Doctor Doom (because of the apocalyptic predictions that sometimes come true), prophesies that the depression that will affect the world economy in the first place will be long. Meanwhile, Russia has something to respond to constantly new sanctions, and the inevitable jump in oil prices is favorable for the Russian Federation but harmful for the economies of the United States and Europe.
At a time when military analysts and political scientists are calculating the outcome — the military, political, geostrategic consequences of the war in Ukraine — expert analysis predicts how this war will affect the global economy.
Renowned economist Nouriel Roubini writes in his article on the website that it is tempting to think that the war in Ukraine will have only a minor economic and global financial system impact, given that Russia represents only 3% of the world economy. But policymakers and financial analysts should avoid wishful thinking.
There is a huge possibility that the world has entered a geopolitical depression that will have huge economic and financial consequences around the world, far beyond the borders of Ukraine.
In particular, a hot war between major powers is now more likely within the next decade. As the rivalry between the US and China in the new Cold War continues to escalate, Taiwan too will increasingly become a potential flashpoint, pitting the West against the emerging new alliance of "revisionist" powers.
For now, the biggest risk in this situation is that markets and political analysts underestimate the implications of this political regime change. By the close of the market on February 24 — the day the Russian troops advanced — US stock markets rose, hoping that this conflict would slow down the willingness of the US Federal Reserve and other central banks to raise policy rates. But the Ukrainian war is not just another minor, economically and financially inconsequential conflict like that seen elsewhere in recent decades. Analysts and investors should not make the same mistake they made on the eve of World War I when almost no one foresaw the approach of a major global conflict. ''Today's crisis represents a qualitative geopolitical leap. Its long-term consequences and importance cannot be overestimated,'' Roubini concluded.
From an economic point of view, a global stagflationary downturn is now very likely. Analysts are already wondering if the Fed and other major central banks will be able to achieve a soft landing after this crisis and its aftermath. Roubini writes that we should not count on it. A war in Ukraine will trigger a massive negative supply shock in a global economy that is still reeling from COVID-19 and inflationary pressures that have continued to build throughout the year. The shock will dampen growth and further boost inflation at a time when inflation expectations are already eroding.
The short-term impact of the war on financial resources is already evident. In the face of a massive risk aversion stagflationary shock, global equities are likely to move from their current corrective range (-10%) into bear market territory (-20% or more). Yields on safe government bonds will fall for a while and then rise after inflation is no longer pegged. Oil and natural gas prices will rise even further — well above $100 a barrel — as will the prices of many other commodities, as both Russia and Ukraine are major exporters of raw materials and food. Safe-haven currencies such as the Swiss franc will strengthen, and gold prices will continue to rise.
The economic and financial impact of the war and the resulting stagflationary shock will of course be greatest in Russia and Ukraine, followed by the European Union due to its heavy dependence on Russian gas. But even the US will suffer. Because global energy markets are so deeply integrated, the jump in global oil prices represented by the Brent benchmark will have a strong impact on US (West Texas Intermediate) crude oil prices. Yes, the US is currently a minor net energy exporter; but the macro shock distribution will be negative. While a small group of energy companies will earn higher profits, households, and businesses will face a massive price shock, forcing them to cut costs.
Given these dynamics, even otherwise, the strong US economy will experience a sharp slowdown, leaning towards a growth recession. Tightening financial conditions and the resulting impact on business, consumer and investor confidence will exacerbate the negative macroeconomic impact of the Russian invasion of Ukraine both in the US and globally.
Another key takeaway from Roubini: ''The coming sanctions against Russia, however large or limited they may be, will inevitably hurt not only Russia, but also the US, the West, and emerging markets.''
Moreover, it cannot be ruled out that Russia will respond to the new Western sanctions with its own countermeasure, namely, a sharp reduction in oil production in order to drive up world oil prices further. Such a move would be a net benefit to Russia as long as the additional increase in oil prices is greater than the reduction in oil exports. ''Putin knows he can wreak asymmetrical damage to the Western economy and markets because he has spent most of the last decade accumulating a military budget and creating a financial shield against additional economic sanctions.''
On the other hand, if central banks bite the bullet and remain hawkish (or even more militant), the impending recession will become more severe. Inflation will be fought with higher nominal and real interest rates, raising the price of money and thus weakening the economy as a whole. We have already seen this film twice, about the oil price spikes in 1973 and 1979. Today's replay will be almost as nasty.
While central banks should aggressively resist a return to inflation, they are more likely to try to falsify it, as they did in the 1970s. They will argue that the problem is temporary and that monetary policy cannot affect or eliminate an exogenous negative supply shock. When the moment of truth arrives, they are likely to stall, opting for a slower pace of monetary tightening to avoid an even worse recession. But it will remove the anchor with further inflationary expectations.
It is tempting to think that the Russian-Ukrainian conflict will have only minor and temporary economic and financial consequences. After all, Russia makes up only 3% of the world economy (and Ukraine is much smaller). But the Arab states that imposed the oil embargo in 1973 and revolutionary Iran in 1979 represented an even smaller share of world GDP than Russia does today.
The global impact of the war in Ukraine will be on oil and natural gas, but it won't stop there. ''The domino effect will deal a severe blow to global confidence at a time when the fragile recovery from the pandemic was already entering a period of deeper uncertainty and rising inflationary pressures. The consequences of the Ukrainian crisis — and the wider geopolitical depression it portends — will be anything but transient,'' Roubini said.
Threats of the Financial Ecosystem in 2022
Due to the slowdown in economic growth, the International Monetary Fund (IMF) and the Organization for Economic Co-operation and Development (OECD) slightly lowered their forecasts for the current year. Their forecast for next year is still valid. However, as experts warn, the spread of new variants of the coronavirus could slow down the economy. At the same time, the pandemic is not the only risk that will keep investors on their toes in 2022.
Vaccine-resistant variants of the coronavirus
Panic gripped financial markets worldwide in November as a new variant of the omicron variant coronavirus was detected in South Africa. A rapidly spreading infection brought down stock indices. For about a week, the markets continued to fluctuate while investors tried to assess the economic consequences of the new mutation. Governments around the world have tightened anti-COVID restrictions to contain the spread of a potentially dangerous virus.
While researchers are studying the "omicron," for which there is still insufficient data, scientists worldwide believe that this variant, although transmitted faster than the "delta," is not as deadly as its predecessor.
But even if omicron does not become a big obstacle to economic growth, the next variant of the coronavirus may become such an obstacle. Experts warn that if universal vaccination fails, the emergence of vaccine-resistant coronavirus mutations could lead to new lockdowns.
If the pandemic drags on, global GDP could fall as much as $5.3 trillion over the next five years from current projections, IMF chief economist Gita Gopinath warned in October. According to her, the main priority of politicians should be the full vaccination of 40% of the population of each country this year and 70% by the middle of next. So far, however, less than 5% of the population in low-income countries have been fully vaccinated.
Global logistics crisis
This year, supply chain disruptions have played a key role in slowing economic growth. Problems with transportation, lack of containers and a sharp increase in demand after the lifting of pandemic restrictions led to a shortage of components and raw materials.
The automotive industry was among the hardest hit by the decline in production in the euro area, including in Germany. Automakers had to reduce production due to a shortage of components, primarily semiconductors.
And while there are signs that supply chain problems will be partially resolved due to falling transportation prices and a rise in chip exports, experts expect supply chain disruptions to continue to hold back economic growth next year.
"We assume that the situation will not improve in 2022 — until the new required sea transportation capacities are deployed in 2023 or until the supply chains are reoriented towards nearshoring (transfer of part of the production to neighboring regions. — Ed. )", says Frank Sobotka, managing director of transport and logistics company DSV Air & Sea Germany.
The shortage of raw materials and components, combined with high energy prices, has led to the fact that inflation in the eurozone has renewed multi-year highs. This has alarmed global investors, who fear that central banks will be forced to raise interest rates prematurely to keep prices down.
The European Central Bank (ECB) argues that the rise in prices is due to temporary factors such as insufficient supply, rising energy prices, and the base effect. As expected in the ECB, inflation will fall as soon as the effects of the global imbalance between supply and demand are smoothed out. With supply chain disruptions lasting longer than previously thought, inflation is expected to continue rising in Europe through much of 2022.
Inflation worries are growing even more in the US, where a rapid economic recovery, including through strong fiscal stimulus, is taking place amid labor and supply shortages. The US Federal Reserve is considering curtailing the stimulus program and reducing bond buybacks.
China's attack on technology companies
A slowdown in the world's second largest economy — China — will definitely add to investors' worries in 2022. The heavyweight of the Asian economy in 2020 helped the world out of the recession caused by the pandemic: it was the only major economy that grew. It is expected to grow by about 8% this year, making China the fastest-growing major economy after India.
Yet the economic recovery is hampered by Beijing's crackdown on Chinese tech giants, including Alibaba and Tencent. Also in this category are over-indebted real estate companies such as Evergrande and Kaisa, as well as the private education industry. The OECD predicts that China's GDP growth in 2022 will be just over five percent.
Beijing’s desire to maintain a ''zero tolerance'' policy for COVID-19, which has kept the country in isolation for more than a year and involves the introduction of severe restrictions even after the discovery of at least one case of infection, will also remain a big risk for the global economy.
Nord Stream 2 and tensions with Russia
In addition, tensions are growing between the West and Russia. Washington has warned Moscow against invading Ukraine against the backdrop of a large-scale pull of Russian troops to the Ukrainian border. The United States and the European Union are discussing the introduction of new economic sanctions against the Kremlin, including the refusal to commission the controversial Nord Stream 2 gas pipeline.
"Tension between the US and Russia poses a huge risk that could bring NATO's eastern allies to the brink of war," Edward Moya, senior financial analyst at online trading platform OANDA, told DW.
''If the US and Europe stop Nord Stream 2, this could lead to a global energy crisis, due to which oil prices could rise to $100 per barrel,'' the expert believes. ''Rise in energy prices could become a straw for central banks around the world, which will consequently accelerate the tightening of monetary policy.
Relations between the US and China also deteriorated sharply — because of Taiwan. China considers Taiwan to be a rebellious province, which, if necessary, should be reunited with the PRC by military means. At the same time, the US definitely expresses support for the Taiwan administration. In addition, the White House announced a diplomatic boycott of the Winter Olympics in Beijing for "genocide in Xinjiang and other violations of human rights." China responded by threatening that the US would "pay" for the decision.
Are we facing a crisis?
March 2020. The whole world follows the news reports on the situation in Ukraine, discusses the Olympic Games in Beijing, and is interested in reports of financial news predicting a "collapse" of the stock market due to the tightening of the financial policy of the FRS and the ECB. Watching the latest world news, not willingly, everyone wonders if the financial crisis of 2022 will affect them. We have prepared some tips for everyone so you can feel comfortable even during the elevated financial vulnerabilities.
Don't take the news to heart
A crisis in the stock markets is normal. Growth and correction are the normal states of the markets. But every time the media creates an informational background that this is the beginning of the end and it will only get worse. However, after six months, everything becomes much better, and everyone forgets about the crisis until the next cycle.
Most importantly, take more time for yourself, your health, and your loved ones. Time and emotions are deflationary assets that will rise in value every day for your life.
Don’t take loans and refinance old loans
There is a certain rule for assessing loan payments per household — no more than 30% of the basic income. If you don't, then you've probably taken on loans in the last couple of years. This is a task that it is desirable to deal with shortly. Look for refinancing programs at banks that offer more loyal monetary policies. Consumer loans can be combined into one loan with a longer term, which helps to reduce the number of mandatory expenses.
When available funds appear, repay loans ahead of schedule with a reduction in the payment term (this option is usually more profitable than reducing the monthly payment).
Prepare a cash cushion (stash)
If there is free money now, save in cash or non-cash ("on the card") US dollars from 3 to 6 monthly expenses of your family. If you do not know the monthly expense, it is probably close to your monthly salary, so try to postpone from 3 to 6 monthly salaries.
I understand that this sounds like a very difficult task if you have not previously saved money from your salary. But even one salary will give you more room to maneuver in cases of illness or dismissal.
Predict financial flows for the next year
I'm talking about forecasts of your family's income and expenses for the year. You need a rough plan of expenses and income if you plan a major purchase in the coming year for which you need to spend more than 2 salaries. This is necessary so that such expenses are not a big surprise. It sounds silly, but often acquaintances find themselves in a situation where, in their daily routine, they forget about large expenses and remember them before making a payment.
If you prepare, it will not cause stress, and you will not lose on commissions for interbank transfers or cash withdrawals. Also, it is a good tool to understand if you can afford such expenses or if it is better to save them for the future.
Don't increase unreasonably expenses
This paragraph intersects with the paragraph on loans and family budget planning. You shouldn't be doing this anytime soon. Now the situation on the markets is the same, and everything is fine in your company, but no one knows how the management will think in 6 months. Check your current spending structure to see what can be removed to reduce the quality of life slightly but cut costs significantly.
No need to invest during a crisis
During periods of crisis, financial scammers become very active, which attracts you to invest your money in their projects. They rush, talk about planning for tomorrow. If you have already formed a financial cushion and have extra money left, then start investing through large brokers in the IIS + Index investment format. You can read online about the principles of index investing and learn from a small amount.
Come up with a plan in case you lose your job
It's a terrible scenario if you lose your job, but you need to be prepared for it. Dust off your resume ahead of time by updating your skills. A crisis is a great opportunity for career growth in a new field.
Looking for part-time and extra work
If you have energy and time left, you can look for part-time jobs or new projects at your place of work. The main condition is that this does not interfere with the work that brings the main income. Otherwise it will only make the situation worse.
Take care of education and health
During a crisis, there is always a lot of time. This time is better spent on education and your health. These are the investments that give the best dividends.
The global economic recovery will face significant headwinds amid Ukraine-Russian War, new waves of non-controlled COVID-19 infections (Omicron), persistent labor market challenges, lingering supply-chain challenges, and rising inflationary pressures. After expanding by 5.5 percent in 2021, the global output is projected to grow by only 4.0 percent in 2022 and 3.5 percent in 2023, according to the United Nations World Economic Situation and Prospects (WESP) 2022 which was launched today.