Following the World Bank slashing its global economic growth forecast by 0.8 percentage points to 2.9%, the International Monetary Fund (IMF) also cut its global growth projections for 2022 and 2023, and expects the world economy to grow 3.2% this year, before slowing further to a 2.9% GDP rate in 2023.
World Bank president David Malpass described the global economic outlook as “grim”, and IMF managing director Kristalina Georgieva also said that it might get worse, adding that the crises faced by the world economy are getting more severe.
Energy: low supply and high prices
First, the energy crisis, which began in the mid-2021 in Europe. With the blazing hot summer and bitterly cold winter, demand for natural gas spiked in Europe. Low reserves and insufficient supply led to a hike in natural gas prices and quickly spread to upstream commodities such as oil and coal. And in February this year, the war in Ukraine broke out and Europe and the US piled on multiple rounds of sanctions on Russia, blocking the energy supply chain to Europe.
Oil and natural gas from Russia, a major global energy exporter, were curbed, leading to an excess of commodities, such as crude oil, its biggest export. In addition, many countries in the northern hemisphere are now entering the peak of summer, with temperatures often hitting 40 degrees Celsius. Under the boiling heat, electricity prices are constantly hitting new highs as energy grids are unable to handle the load or energy is short in supply.
Many countries have had to restart coal mining, thus slowing their progress towards peak carbon emission and carbon neutrality.
According to International Energy Agency executive director Fatih Birol, oil, natural gas and electricity are the three main concerns of the global energy crisis, and are the main drivers of global inflation. More importantly, the current energy crisis is larger and more prolonged than the crisis in the 1970s and 1980s, and exposes the flaws in traditional energy and the insufficient supply of new energy sources, as well as the lack of effective bridging between the two. Many countries have had to restart coal mining, thus slowing their progress towards peak carbon emission and carbon neutrality.
Inflation: rising productions costs means increased consumer prices
Second, the inflation crisis. Inflation is at its highest in the US in 40 years and the eurozone in 25 years. Furthermore, dozens of other economies including Sweden, South Korea, Argentina and Venezuela will see the highest inflation rate in ten years.
According to IMF data, since the pandemic began, global inflation has gone up by 4.2 percentage points, and is accelerating, from 1.5% last year to 2.7% this year. This round of inflation was driven by global quantitative easing, especially in the US and Europe, and the overall increase in commodity prices. The general indicators of global inflation are the direct impact of the Producer Price Index (PPI) on the Consumer Price Index (CPI), and the US’s and Europe’s high inflation on other countries.
To control inflation, many countries are markedly tightening their monetary policies on a frequent basis, while companies’ financing costs are escalating, eating into profits.
The rise in PPI signifies increased costs of purchasing and operations for large companies, while the rise in CPI shows an increase in consumption costs, weighing down on supply and demand. To control inflation, many countries are markedly tightening their monetary policies on a frequent basis, while companies’ financing costs are escalating, eating into profits.
Notably, inflation in poorer countries is more severe, and its people are struggling to survive. Venezuela, Sudan, Zimbabwe, Turkey, Argentina and Yemen have the highest inflation rates this year, and the World Bank has warned that inflation will cause global poverty to increase by 12%.
Currency: rising US dollar
Third, the currency crisis, also known as the exchange rate crisis, which was previously seen in Mexico, Thailand and Argentina. This year, the US Federal Reserve (Fed) has made unprecedented interest rate hikes, and the US dollar has jumped in value, while other currencies have fallen. The euro fell to parity against the US dollar for the first time in two decades, while the Japanese yen hit a 24-year low. Apart from the RMB, which showed a slight dip, emerging market currencies seem to be in a race for the worst place.
As the euro and Japanese yen constitute 58% and 14% respectively in the US Dollar Index — a total weight of 70% — they went into a free fall against the strong US dollar. Meanwhile, emerging market currencies are mostly pegged against the US dollar, so it is natural that they would have a “see-saw” relationship.
Logically, a devaluation in currency would be good for exports, but with disrupted global industry chains and low consumer appetite due to the pandemic, countries are seeing constant trade deficits. Weakening exchange rates are pushing up import costs, in turn increasing domestic inflation.
... the growing yield spread between the US dollar and other currencies would prompt international investment funds to engage in the short-selling of the latter, increasing the volatility of the global financial market.
Notably, many countries have resorted to dumping the US dollar to support their own currencies, further weakening the already-shaky foreign exchange reserves. Also, the rising value of the US dollar would result in capital outflow from countries outside of the US, especially emerging markets.
Some already “anaemic” economies would bleed out even more, while the growing yield spread between the US dollar and other currencies would prompt international investment funds to engage in the short-selling of the latter, increasing the volatility of the global financial market.
Debt: rising interest expenses
Fourth, the debt crisis. While the rampaging Covid-19 pandemic has dealt a big blow to the economy and led to falling public revenue, large and continuous expenses are still necessary to fight the pandemic. As the monetisation of fiscal policies (money-printing) has become commonplace in Europe, the US, Japan and other countries, debt has also inevitably soared.
At the same time, emerging markets that took advantage of the Fed’s loose monetary policy prior to the pandemic to gain access to large amounts of US debt, are now facing rapidly rising debt. The Institute of International Finance forecasts global sovereign debt to increase by 9.5% to a record US$71.6 trillion in 2022. Debt servicing costs are also set to rise to US$1.16 trillion.
While the US’s national debt has exceeded US$30 trillion, the US could use its power to coin money to devalue the dollar and dilute default risks. However, this is not an option for other economies — after the pandemic started, the government debt-to-GDP ratio in the eurozone rose to 95%, with Italy, the third largest economy in the region, reporting a debt of 2.76 trillion euros (US$2.8 trillion). Debt servicing cost for this year alone is already 65.7 billion euros. Italy could become the second Greece to trigger a European debt crisis.
Apart from Sri Lanka, which has declared “bankruptcy”, a third of emerging market economies are currently trapped in debt distress.
Additionally, Japan has the world’s highest debt-to-GDP ratio, with a public debt exceeding 1,200 trillion yen (US$9 trillion). Whether the Japanese government is able to withstand the enormous pressure of rising costs amid the yen’s sharp depreciation remains a question.
Importantly, emerging markets are seeing an unprecedented increase in interest expense, due to higher debt servicing costs as a result of currency devaluation on the one hand and surging government bond yields as a result of higher interest rates on the other hand.
Apart from Sri Lanka, which has declared “bankruptcy”, a third of emerging market economies are currently trapped in debt distress. Among them, over ten countries including Chile, Egypt, Turkey and Brazil are likely to default.
Food: impact of Russia-Ukraine war
Fifth, the food crisis. Apart from regional droughts, hailstorms, strong winds, torrential rains and other extreme weather that have led to poor harvest, the soaring seed, fertiliser and fuel prices have also caused global food prices to hit a record high since the inception of the Food and Agriculture Organization’s food price index in 1990.
At the same time, transportation disruptions due to the Russia-Ukraine war have affected 30% of global cereal export, 25% of wheat, 23% of corn and 67% of sunflower oil from the two countries.
To reduce inflationary pressures and the impact of the Russia-Ukraine war, over 20 countries have now adopted more than 50 food export restrictions, affecting nearly a fifth of the global food trade and further pushing up food prices.
To reduce inflationary pressures and the impact of the Russia-Ukraine war, over 20 countries have now adopted more than 50 food export restrictions, affecting nearly a fifth of the global food trade and further pushing up food prices. As the saying goes, “Food is the first necessity of the people.”
The UN’s 2022 Global Report on Food Crises warned that humanity is likely to face the biggest food crisis since the Second World War. The World Food Programme (WFP) revealed that as of June 2022, 345 million people face acute food insecurity, and estimated that the number of people affected by acute hunger could rise by 47 million, bringing the total to 811 million. Notably, it is the world’s poorest and most vulnerable that are the hardest hit by the food crisis and these are also the regions susceptible to riots, armed conflicts and geopolitical risks.
Decision-making: unpredictable politics
Lastly, the decision-making crisis. The international stage is riddled with problems this year. Former Japanese Prime Minister Shinzo Abe was assassinated; UK Prime Minister Boris Johnson was “forced” to resign; Italian Prime Minister Mario Draghi tendered his resignation after failing to unite his coalition government; and former Sri Lankan President Gotabaya Rajapaksa fled the country while acting President Ranil Wickremesinghe had also offered to resign when he was prime minister.
No one can predict what will happen next in the international political arena, but we can be sure of a few major events. Among them, the US will hold its midterm elections in November, with grim prospects for the Democratic Party; Chile is set to vote on a new constitution; and a constitutional revision is being debated in Japan.
The aforementioned crises could either take place one at a time or simultaneously, overlapping and combining to form a serious global and systemic crisis that would certainly land a severe blow to the global economy.
While a transfer of power and change in government can produce dividends in the form of policy innovation, it could also trigger political turmoil and policy breakdowns, as well as national or regional armed riots and military conflicts, ultimately endangering bilateral and multilateral trade and regional economic stability.
The aforementioned crises could either take place one at a time or simultaneously, overlapping and combining to form a serious global and systemic crisis that would certainly land a severe blow to the global economy.
To minimise the impact, the monetary policies of various countries must strive to achieve economic growth, manage inflation, as well as strike a balance between controlling inflation and improving wages. It is also necessary to grasp the relationship between the opening of the capital market and ensuring financial market stability, while effectively mobilising public financial resources to strengthen the support and assistance for the needy.
On top of these, governments must maintain effective communication on inflation control, bilateral and multilateral trade, and the easing of the geopolitical situation. International society must also strive to maximise its humanitarian functions and actively ease and defuse the unpredictable factors affecting the global economy.
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