Threats to the World Economy

in 2022

The global economy made the transition from recovery to expansion in 2021 amid ongoing turbulence from the Covid-19 pandemic. An uneven economic expansion generated supply-demand imbalances, leading to major supply chain disruptions and rising inflation. With ongoing vaccination challenges in much of the world and the worrying emergence of the Omicron variant, along with supply bottlenecks plus rising inflation and debt, the pandemic continues to exert its relentless push and pull on a beleaguered world. The slowing recovery prompted economists at the International Monetary Fund (IMF) and the 38-member Organization for Economic Cooperation and Development (OECD) to slightly trim their global growth forecasts for the year in October and December, respectively. They, however, maintained their outlook for 2022 but warned that Covid variants could derail growth. They stressed the need to swiftly vaccinate a vast majority of the global population. All the while the formidable geopolitical problems that world was wrestling with pre-Covid—from spiralling tensions between the West and China and Russia to the dearth of international action to counteract climate change—haven’t gone away. Just the opposite.

So what will 2022 bring?
Various international institutions have made their own prediction for the upcoming year. However, almost all of them are in unison to identify the following challenges to the world economy in the year ahead.

1. Omicron and more lockdowns
The first is the new coronavirus variant omicron and new closure decisions. After it was reported that the first patient died in the United Kingdom due to the variant, excessive restrictions, quarantines and complete closures at the border gates in many European countries have again appeared. Many European countries, especially France, started to talk about returning to remote working conditions for two or three days a week. In the surveys conducted in many leading countries in the last six months on work life, it has been observed that even if the pandemic is over, people will demand that remote working continue at least two days a week. However, in the case of school closures and strict quarantine decisions, again this means the loss of income in the service sector all over the world, which is a risk that would highly constrain countries’ economy, growth, employment and public finance.
Although it is early for a definite verdict on the omicron variant of Covid-19, it may prove, like its predecessor variants, less deadly. That would help the world get back to something like pre-pandemic normal — which means spending more money on services. A rebalancing of spending could boost global growth to 5.1% from the Bloomberg Economics base forecast of 4.7%.

2. Supply chain bottlenecks
Supply chain disruptions have played a key role in stalling global recovery in 2021. Shipping snarls along with a shortage of shipping containers, and a steep rebound in 

demand once pandemic-related restrictions were eased, have left producers scampering for components and raw materials. The auto sector has been among the worst-hit, with production tumbling in the eurozone, including in Germany, in recent months. Carmakers have cut production as intermediate equipment, especially semiconductors, remain in short supply.

While there are signs that supply shortages are easing with a drop in shipping costs and a rise in chip exports, experts expect the supply bottlenecks to continue weighing on growth well into next year.

3. The consumer price index
The third critical risk is the high global inflation risk that is expected to continue until the mid-spring of next year. It is expected that the consumer price index (CPI) increase rate in the United States will reach 7% at the end of 2021 and will maintain this rate until the beginning of April. Although it is expected that the annualized headline inflation will start to decrease in a significant number of the G-7 countries as of mid-summer of 2022, the global inflation risk due to global commodity, agriculture and food, energy prices and logistics costs poses a significant problem.

4. China-Russia concerns
The fourth critical risk could result from China and Russia. The most critical issue is the reluctance of the former, as the most important supplier country of global trade, to distribute raw materials, rare metals, intermediate products and final products that will respond to the needs of the world economy and its “loss of appetite” in terms of meeting those needs.
On the other hand, due to the possible steps Russia may take regarding Ukraine, the tension that will increase between Russia and the Europe Union and between Russia and the US will undoubtedly affect regional and global trade, and the world economy as a whole.

5. The fiscal policy
The fifth risk is the narrowing of the fiscal policy of countries. Although Turkey is lucky in terms of budget balance and public debt stock, many leading countries have to shrink their budget deficit and slow the increase in public debt in 2022. This, in turn, may adversely affect the growth performance, employment and public social support opportunities of countries.

6. Soaring inflation
Finally, the sixth risk is soaring inflation worldwide. The raw material and input shortages, along with higher energy prices, have pushed inflation in the eurozone and the United States to multiyear highs. This has spooked global investors who fear that central banks would be forced to prematurely raise interest rates to tame soaring prices.

The European Central Bank has maintained that prices have been pushed up by temporary factors such as supply shortages, higher energy prices and base effects. It expects inflation to cool once the effects of global demand-supply imbalances subside.

With supply chain disruptions proving to be more persistent than earlier thought, inflation is expected to continue running hot for most of 2022, keeping European central bankers in a tight spot.

In the US, inflation concerns are expected to be even greater, propped up by rapid economic recovery, a massive fiscal stimulus and labour and supply shortages. The Federal Reserve has said it would be tapering its bond-buying stimulus plan more quickly and has signalled interest rate hikes in 2022. A Fed rate hike could spell trouble for some emerging economies, including South Africa, Argentina and Turkey, which could see a flight of capital.

The writer is a student at PU.