Human consequences of the fragmentation of the global economy

The Community of Chief Economists of the World Economic Forum expects lower economic activity, higher inflation, lower real wages and greater food insecurity around the world in 2022, highlighting the consequences devastating human rights of the fragmentation of the global economy.

Reversing previous expectations for recovery, the majority of respondents to the latest survey expect only a subdued economic outlook in the United States, China, Latin America, South Asia and the Pacific, East Asia East, Sub-Saharan Africa and the Middle East and North Africa in 2022. In Europe, the majority expects the economic outlook to be weak.

The choices of businesses and governments are expected to result in further fragmentation of the global economy and unprecedented shifts in supply chains, creating a perfect storm of volatility and uncertainty. These models are expected to create further difficult trade-offs and choices for policy makers and, without greater coordination, shocking human costs. These are the main findings of the quarterly outlook from the World Economic Forum’s Chief Economists, released today.

“We are on the cusp of a vicious cycle that could impact societies for years. The pandemic and the war in Ukraine have fragmented the global economy and created profound consequences that threaten to undo the gains of the past 30 years. Leaders face tough choices and trade-offs domestically on debt, inflation and investment. Yet business and government leaders must also recognize the absolute necessity of global cooperation to prevent economic misery and hunger for millions around the world. This week’s annual meeting of the World Economic Forum will provide a starting point for such collaboration,” said Saadia Zahidi, Managing Director of the World Economic Forum.

Rising inflation, falling real wages and food insecurity

The war in Ukraine, continued outbreaks of COVID-19 variants and associated supply shocks are impacting inflation expectations. The majority of chief economists polled by the Forum expect high or very high inflation in 2022 in all markets except China and East Asia – 96% expecting high or very high inflation in 2022 high or very high inflation in the United States, 92% for Europe and 86% for Latin America. Meanwhile, two-thirds of chief economists expect average real wages to fall in the near term in advanced economies, while a third are uncertain. Ninety percent of respondents expect average real wages to fall in low-income economies.

With wheat prices expected to rise by more than 40% this year and vegetable oil, grain and meat prices reaching historic highs, the war in Ukraine is exacerbating world hunger and the cost crisis of life. Over the next three years, chief economists expect food insecurity to be worst in sub-Saharan Africa, the Middle East and North Africa. At the current trajectory, the world is on track for the worst food crisis in recent history, compounded by the added pressure of high energy prices.

These expert predictions are echoed in the experience of the general public. A recent survey in 11 countries, conducted by Ipsos with the World Economic Forum, reveals high levels of public economic pessimism in the face of a cost of living crisis. Twenty-five percent of the public say they find it somewhat or very difficult to manage financially, ranging from two-thirds of Turkish citizens to 16% of American and German citizens. The largest group (34%) say they are “on the verge of getting through this”. Only 11% say they live comfortably while three in ten (29%) think they are doing well.

Expectations of price increases are also widespread across the 11 countries – almost four in five people expect the cost of their food purchases to rise, while three-quarters expect utility bills to rise utilities such as gas and electricity. For most countries, a rise in food prices is the area which households believe would have the greatest impact on their quality of life – this is the case for the United States, Canada, Italy, Japan, Australia, Poland and Turkey. In the other four countries (Britain, Italy, Germany and Spain), an increase in utility bills would have the greatest effect.

A difficult balancing act for policy makers

Faced with the challenge of containing inflation without tipping economies into recession, chief economists are divided. While a majority (57%) agree that the risks associated with higher inflation in low-income economies outweigh those associated with a short-term contraction due to monetary tightening, views on the effects in countries high income are more shared.

While fiscal spending is expected to increase in many countries to cope with current developments, balancing the risks of a cost-of-living crisis with higher debt is a major challenge for policymakers. In advanced economies, 54% of chief economists expect energy price subsidies, while 41% expect food price subsidies. In low-income economies, the vast majority think food price subsidies will be needed (86%), while 62% expect energy price subsidies. However, this need will have to be weighed against a higher risk of default (81% see this as an increased risk for developing economies).

With the World Bank expecting energy prices to rise more than 50% in 2022, before falling in 2023-24, policymakers must balance energy insecurity risks with transition towards greener energy. Most chief economists surveyed expect policymakers to try to tackle both challenges simultaneously. However, a clear majority of respondents expect the priority of energy security to be based on carbon-intensive sources rather than greener sources in all regions except Europe. and China.

Fragmentation and politicization of supply chains

As supply chains enter their third year of disruption, governments and businesses are rethinking their approach to exposure, self-sufficiency and security in their supply chains. The chief economists consider it likely or very likely that multinational companies will both localize and diversify their supply chains over the next three years, realigning them along geopolitical fault lines.

The November 2021 edition of Perspectives from the Chief Economists identified “de-globalization” as an emerging trend driven by the impact of the pandemic. The war in Ukraine and its geopolitical and economic fallout are accelerating these trends, with declining physical integration and growing friction in virtual space. A majority of chief economists surveyed for the month of May Outlook expect greater fragmentation in goods, technology and labor markets over the next three years, while most expect services to remain stable or become more globalized.

Four futures for economic globalization

A supplementary report from the World Economic Forum, released today, charts possible trajectories of globalization in the next five years. Four futures for economic globalization: scenarios and their implications describes how the nature of globalization can change as economic powers choose between fragmentation or integration into the physical and virtual dimensions of the global economy. The four scenarios are:

Globalization 5.0: Reconnection describes physical and virtual integration – a new form of globalization that combines integration with stronger national safety nets and alignment with global tax and technology frameworks.

Analog networks: virtual nationalism describes physical integration and virtual fragmentation – a potential future in which trade, especially of strategic commodities, is secure, but a technological race, cybersecurity issues and uncoordinated regulation lead to virtual disintegration.

Digital Dominance: Agile Platforms describes physical fragmentation and virtual integration, as the physical movement of goods and people declines and large global platforms dominate global economic activity.

Autarkic world: systemic fragmentation depicts both physical and virtual fragmentation compared to today, as leaders turn inward and seek greater control over production, services, people and technology.

The report calls for “no regrets actions” from policy makers such as: global cooperation on the climate crisis; investing in human capital to prepare people for a range of economic futures; and building resilience through greater economic integration, knowledge sharing and diversification.

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