The global economic outlook is deteriorating on central banks’ anti-inflation efforts, the war between Russia and Ukraine and China’s prioritization of political control over economic growth. A global recession is likely, with at least slower economic growth all but certain.
People who have followed my work for years often say that I’m an optimist, and usually I am. For now, however, the weight of the evidence points to a slowdown in the global economy.
Just as the Federal Reserve has raised interest rates in the US, many central banks around the world are tightening monetary policy. The Council on Foreign Relations releases a Global Monetary Policy Tracker showing tightening at most of the 54 central banks they track as of August 2022.
Notably, the European Central Bank has raised interest rates, signaling that further hikes are likely in the coming months. So did the Bank of England and the Bank of Canada. Other countries with a tightening include Australia, India and many in Latin America. The only major countries loosening monetary policy are Russia and China. The global tightening is likely to slow global economic growth and lead to a recession in some countries.
Tightening isn’t a mistake, but in most cases it comes too late, causing more economic damage than it started before.
Europe faces the additional challenge of scarce energy. Their dependence on Russian energy has increased over the past decade from 25% of total gas needs in 2009 to 32% in 2021.
In recent weeks, the European Union announced a plan to cap the price of Russian natural gas, and President Putin threatened to further restrict energy supplies to Europe. Rationing systems are under discussion, electricity prices have skyrocketed and energy-intensive industries are shutting down some of their European operations. The likely outcome will be a full-blown recession in Europe this winter, barring a quick fix.
China’s economy is weakening, as I recently described at length. President Xi Jinping has prioritized political and ideological control over economic growth, pursuing a zero-Covid policy that has shut down parts of the economy. Serious Western analysts are discussing the possibility of a Chinese invasion of Taiwan, a blockade, or at least much greater pressure on Taiwan to accept mainland law and a puppet leader. The likelihood of an actual shooting is likely low, but the consequences are very high, warranting serious contingency planning.
The Russian and Chinese woes are prompting companies around the world to shorten and simplify their supply chains, and to relocate to their home countries whenever possible. This will be costly and will effectively reduce global production capacity. Change will come slowly and is necessary given international tensions, but the changes will reduce economic output around the world.
Commodity prices are usually a good gauge of current sentiment regarding future global economic growth. As of this writing, despite problems with Russian energy supplies and a drop in OPEC production, oil prices have been falling recently.
Copper prices have also fallen in recent weeks. Copper is another good indicator of economic growth expectations.
On the positive side of the ledger, Canada and Mexico, both major export markets for the United States, are less vulnerable to these global economic headwinds.
How bad will the global slump be? Probably not as catastrophic as the 2008-09 financial crisis, but certainly worse than the smaller cycles we’ve seen. And if a shootout breaks out over Taiwan, the world will be plagued by economic catastrophe for a few years.
Business contingency planning for a global downturn should take into account the interest rate-sensitive portion of the risk. Monetary tightening tends to lead to cuts in construction, first residential and later non-residential, as well as corporate capital spending and large consumer spending. Companies that sell into these industries will be the most vulnerable.
Companies trading with Europe should be concerned. The main concern would be selling goods and services to energy-intensive companies in Europe, as they may have to shut down operations to heat homes in winter. Discretionary consumer spending will also be reduced. Businesses that rely on materials from European manufacturers should consider potential supply chain issues arising from the energy crisis.
Companies selling to China can expect slower growth, perhaps even a slowdown in some sectors like building materials. While the monetary policy impact will be sharp but relatively short-lived, China’s economic downturn will be gradual and long-term, at least as long as Xi Jinping’s policies are in effect.
Organizations doing business with China, Taiwan, and perhaps even their immediate neighbors must create contingency plans for conflict. No particular scenario seems much more likely than the others, so several possibilities should be considered.
After all, every major shift brings growth opportunities for a few companies that are creative, visionary, and bold. Being open to growth opportunities in times of change will pay off later in the upswing.