Age of scarcity begins with US$1,6tn hit to world economy
THE ties that bind the global economy together, and delivered goods in abundance across the world, are unravelling at a frightening pace. Russia’s invasion of Ukraine and China’s Covid-19 zero lockdowns are disrupting supply chains, hammering growth and pushing inflation to forty-year highs.
They’re the chief reasons why Bloomberg Economics has lopped US$1,6 trillion off its forecast for global GDP in 2022.
But what if that’s just an initial hit? War and plague won’t last forever. But the underlying problem — a world increasingly divided along geopolitical fault lines — only looks set to get worse. Bloomberg Economics has run a simulation of what an accelerated reversal of globalisation might look like in the longer term.
It points to a significantly poorer and less productive planet, with trade back at levels before China joined the World Trade Organisation. An additional blow: inflation would likely be higher and more volatile.
“Going to Stay”
For investors, a world of nasty surprises on growth and inflation has little to cheer equity or bond markets. So far in 2022, commodities — where scarcity drives prices higher — have been among the big winners, along with companies that produce or trade them. Shares in defence firms have outperformed too, as global tensions soar.
“Fragmentation is going to stay,” says Robert Koopman, the WTO’s chief economist. He expects a “reorganised globalisation” that will come with a cost: “We won’t be able to use low-cost, marginal-cost production as extensively as we did.”
For three decades, a defining feature of the world economy has been its ability to churn out ever more goods at ever lower prices.
The entry of more than a billion workers from China and the former Soviet bloc into the global labour market, coupled with falling trade barriers and hyper-efficient logistics, produced an age of abundance for many.
But the last four years have brought an escalating series of disruptions. Tariffs multiplied during the US-China trade war. The pandemic brought lockdowns. And now, sanctions and export controls are upending the supply of commodities and goods.
All of this risks leaving advanced economies facing a problem they thought they’d vanquished long ago: that of scarcity.
Emerging nations could see more acute threats to energy and food security, like the ones already causing turmoil in countries from Sri Lanka to Peru. And everyone will have to grapple with higher prices.
Viewed from one angle, all of this is part of a global rupture that pits Western democracy and free markets against Chinese and Russian authoritarianism. But it’s not necessary to believe in a Manichean struggle between good and evil — or expect the rival camps to separate behind a new iron curtain — to see the prospective costs.
About $6 trillion of goods — equivalent to 7 percent of global GDP — are traded between democratic and autocratic countries. To illustrate the risks of the great unravelling, Bloomberg Economics introduced a 25% tariff on all that traffic into a model of the global economy.
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