The global economic climate is worsening due to central banks’ efforts to fight inflation, the war between Russia and Ukraine, and China’s prioritization of political control over economic growth. A global recession is likely, with slow economic growth almost certain.
People who have followed my work for years often say that I am an optimist, and I usually am. Right now, however, the weight of evidence points to the country’s economic stagnation.
Just as the Federal Reserve raised interest rates in the US, many central banks around the world tightened monetary policy. The Council on Foreign Relations publishes the Global Monetary Policy Tracker, as of August 2022, which shows the tightening among the 54 most banks they track.
Specifically, the European Central Bank raised its policy rate and indicated that further increases may be possible in the coming months. So did the Bank of England and the Bank of Canada. Other strengthening countries include Australia, India, and many in Latin America. The only major countries to ease monetary policy are Russia and China. A global economic slowdown may slow global economic growth and cause recessions in some countries.
Europe has the added challenge of hard power. Their dependence on Russian energy has increased over the past decade from 25% of total gas demand in 2009 to 32% in 2021.
In recent weeks the European Union announced a plan to reduce the price paid for Russian natural gas, and President Putin threatened to further limit the supply of energy to Europe. Balancing plans are being discussed, electricity prices have risen, and energy-intensive industries are closing some of their European operations. The likely outcome, without an immediate solution, will be a full-blown European recession this winter.
China’s economy is faltering, as I explained recently. President Xi Jinping prioritized political and ideological control over economic growth, and pursued a zero-Covid policy that closed parts of the economy. Serious western analysts discuss the possibility of a Chinese attack on Taiwan, a ban, or at least more pressure on Taiwan to accept the country’s laws and a puppet leader. The probability of an actual shooting is probably low, but the results are so great, it justifies the emergency planning.
The problems in Russia and China are leading companies around the world to shorten and simplify their supply chains, repatriating where possible. This will cost, effectively reducing production capacity worldwide. Change will come slowly, and is necessary given international tensions, but changes will reduce global economic output.
Commodity prices are generally a good measure of current sentiment about future global economic growth. As this article was written, oil prices have fallen recently despite Russian energy supply problems and OPEC production cuts.
Copper prices have also fallen in recent weeks. Copper is another good indicator of expectations about economic growth.
On the positive side of the ledger, Canada and Mexico, both of the United States’ largest export markets, are not sensitive to these global economic storms.
How bad will the global collapse be? Maybe not as catastrophic as the financial crisis of 2008-09, but certainly worse than the sub-cycles we’ve seen. And if there is a shooting over Taiwan, then an economic disaster will befall the world for a few years.
Business contingency planning for a global recession should recognize the critical risk component of interest. Fiscal tightening tends to reduce construction, first residential and later non-residential, as well as business spending and big-ticket consumer spending. Companies that sell in those industries will be at greater risk.
Companies that trade with Europe should be concerned. The main concern will be the sale of goods and services to businesses that use a lot of electricity in Europe, as operations may need to be stopped to heat homes in winter. Discretionary consumer spending will also be reduced. Businesses that rely on materials from European manufacturers should consider potential problems due to energy shortages.
Businesses that sell to China can expect slower growth, perhaps even a decline in other sectors such as construction materials. Although the impact of monetary policy will be sharp but short-lived, China’s economic slowdown will be gradual and long-lasting, at least as long as Xi Jinping’s policies are effective.
Organizations doing business with China, Taiwan and possibly their immediate neighbors should make emergency planning for conflicts. No particular situation seems more likely than others, so many possibilities should be considered.
Finally, every big change brings growth opportunities for a few creative, visionary and daring businesses. Being open to growth opportunities in changing times will pay dividends in the end.
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