Recovery Disrupted – corporates & governments grapple with paradoxes

Recovery Disrupted – corporates & governments grapple with paradoxes

Redrawing supply chains, a sharply polarised world, tightening monetary policies, slower growth – these are times when responding to one crisis could create another elsewhere

Corporate chiefs, economists, and policymakers of the government are having sleepless nights. Corporates are grappling with redrawing supply chains along geopolitical fault lines as the world gets sharply polarised; policymakers are tightening monetary policies to combat inflation but risking slower growth. These are paradoxes when finding the answer to one challenge creates another crisis elsewhere. For instance, if subsidies are given to citizens to offset high energy costs, this action runs against a tighter monetary policy needed to address inflation. Redrawing supply chains would mean higher costs, lost time, and market share in the immediate term before the gains start to come in.

Central banks in most countries, led by the United States, are pulling back the pandemic stimulus and raising interest rates to combat runaway inflation. This is having an unintended impact on slowing economic global growth. The sombre economic mood is decidedly different from the early part of the year when the world was anticipating a post-pandemic economic rebound. The May 2022 Chief Economists’ Outlook from the World Economic Forum issues a dire warning about recovery being disrupted.

Image: Multinationals’ choices and trade-offs; Source: World Economic Forum

Complex trade-offs

Policymakers are facing complex trade-offs in monetary policy to tread the fine line between reining in inflation without tipping economies into recession, or stagflation – a situation where the inflation rate is high, the economic growth rate slows, and unemployment remains steadily high.

At the beginning of 2022, the consensus forecast was for the largest economies to have returned to pre-COVID growth paths by the end of the year, led by China, Europe, and the US. The OECD had forecast global growth at 4.5% in 2022 and 3.2% in 2023. Inflation was running high across advanced economies but was expected to wane over the course of 2022 as supply bottlenecks were resolved, excess demand disappeared, and monetary policy action was fine-tuned to manage the phase-out of pandemic-related crisis measures. However, the invasion of Ukraine by Russia has transformed earlier projections, alongside other trends. The latest IMF forecast from April 2022 sees global growth dropping to 3.6% in2022 from an estimated 6.1% in 2021 and its January 2022 forecast of 4.4%.

Growth prospects downgraded

Growth prospects for emerging and developing Asia in 2022 are downgraded by 0.5 percentage points to 5.4%. They depend heavily on China’s economy, which has been weakened by new COVID-19 outbreaks and tough lockdowns and is expected to grow by 4.4% – down from a January projection of 4.8%. The US sees a downgrade of 0.3 percentage points to 3.7% arising from faster monetary tightening in response to accelerating inflation.

Looming food crisis

The biggest worry, however, is a looming food crisis triggered by the war in Ukraine. In 2020, 36 countries imported more than 50% of their wheat from Russia or Ukraine. In March 2022, the Food and Agriculture Organization (FAO)’s Food Price Index (FFPI) leapt to its highest level since its inception in 1990. Vegetable oils, cereals, and meat sub-indices are at all-time highs, while the levels of sugar and dairy products rose significantly as well. Wheat prices are forecast to increase by more than 40%, reaching an all-time high in nominal terms this year. The World Food Program (WFP)’s monthly food procurement costs are estimated to increase by a total of $23 million as a result of the war’s impact on wheat prices alone.

Supply chain dislocations

Global supply chains have been increasingly redrawn over the past years, including through Brexit, the deep impact of the global pandemic, and the fallout and uncertainty from the war in Ukraine. Amid fears of continued shocks, both governments and business are rethinking their approach to exposure, self-sufficiency, and security in trade and production relationships. Against this backdrop, multinational corporations have multiple strategies at their disposal to reconfigure their corporate structures and prepare their supply chains for an increasingly volatile future.

Chief Economists expect a substantial restructuring of supply chains in the next three years. Responding to the state of the global economy, President Biden mandated a comprehensive assessment of the vulnerability and resilience of the US’ critical supply chains in February 2021.

The realignment of global value chains along new geopolitical fault lines was also considered likely by a large majority of respondents. In the context of supply-chain reconfiguration, companies are shifting from efficiency to resilience and are expected to prioritize localization over-diversification. Chief Economists have little expectation for the notion of “wait and see” in the decisions of multinationals on where to place their supply chains, as pressures continue to rise globally. At the same time, the current geo-economic environment will make restructuring a complex and costly process for multinational corporations.

Energy shocks

The World Bank expects energy prices to rise by more than 50% in 2022, before easing in 2023 and 2024. In response, on 1 April 2022, member countries of the International Energy Agency (IEA) agreed to the largest emergency oil stock release in the IEA’s history. Despite such drastic measures, the price of Brent crude oil could still average $100 per barrel in 2022 – its highest level since 2013 and an increase of more than 40% compared to 2021.

All-time price records are being shattered in Europe for natural gas as well as for coal. Ripple effects are being felt across the globe. In the short term, governments are limited to mitigating price shocks and guaranteeing energy security based on their current energy systems and supply dependencies. In the medium term, countries find themselves faced with the challenge of maintaining energy security while transforming their energy systems to meet climate-related targets.

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