With progress on vaccines, new standards around marks and sanitation a way out of the pandemic seems to be within reach. Economic recovery is underway across due to vaccine efficiency, vaccines roll out, the fact that restrictions in terms of economic activity have been removed and stimulus packages by many governments. But even as the global economy is taking on a more optimistic tone the issue which has dominated headlines is that of resiliency. How interconnected global economies are going to endure the massive disruptions caused by the pandemic. So while there is a recovery on the horizon, the scale and the nature of that recovery is yet uncertain.
The traditional monetary policy was iinadequate to deal with the economic calamity that followed with Covid. Strategists believe that the economic consequences of this shock, compared to 2008-9 are more likely to linger. More so now than ever in modern economic history, the role of monetary policy and fiscal policy is going to shape the market. In terms of megatrends the continuing conflict between the United States and China, and how that plays out will have huge implications for not just the two biggest economies but for the rest of the world. Added to this, across countries, there is a growing trend towards increased political polarization which makes it difficult to take thoughtful and quick policy decisions. So all of these trends combined are creating an enormous uncertainty.
What are the prospects of the global economy moving forward?
The topic of resilient supply chains has become the core of global trade. Covid has made it a real issue and it’s been in the news nonstop. Congestion of ports in the US and Europe has disrupted sailing schedules and equipment shortages particularly in exporting countries creating breaks in the supply chain. Higher commodity prices and global shipping costs are currently adding 1.5% to inflation across G20 Nations by December it would be by 1.75% and further up by 1% in 2022. The drag from the pandemic and supply bottlenecks is unlikely to end this year.
There are two by-products of this – trade disruption and national security implications. Record disruptions caused by covid-19 aren’t really a problem of either capacity or infrastructure, so are temporary and enough cause to change the global economy for the long term? The covid pandemic and crisis highlighted how much of the supply chains go through Asia particularly China. This has caused America to review supply chains across multiple strategic sectors, the defence industry, public health, biological industrial base information technology, the energy and transportation sectors. so this is a huge realisation. The decoupling which was thought to be impossible until some time back, now seems inevitable and the key elements of this shift and the new environment will remain long after the virus passes. President Joe Biden hosted a summit on strengthening global supply chains on the sidelines of the G20 summit, and the focus was on transparency, security, sustainability, diversity, openness and predictability in order to overcome the challenge. Before the covid-19 supply chains were governed by cost consideration, wherein supply was concentrated across geographies and the demand was much more dispersed but in the post-pandemic global economy aspects such as dimensions of sustainability, diversity, dispersion and reliability in the process are becoming more important.
The global economy is certainly at a crossroads. The US has lost its relative leadership in technology compared to China, in military leadership, it is losing relative positioning. For the US it is a moment of reflection and national trust in the leadership. The future looks like it includes crypto, net-zero, inclusive capitalism and more but it is also heavily shipped by today’s global finance leaders who are using this moment of disruption to reimagine the understanding of the value in today’s markets and financial institutions. Leaders are increasingly laying emphasis on sustainability, broadly defined in terms of environmental social and governance across different dimensions of society. Even for global investors, this appears to become a primary goal. Global leaders are thinking about sustainability, diversity and inclusion, in a much more forceful way. where the capital goes, is a big driver of the financial system, and now the amount of capital that fits under sustainability has increased.
National Security versus Economic Partnership
Global leaders have been talking about creating national champions and high technology industries. The world is looking to the US for leadership on how to work with China. The world is witnessing great power competition with China and yet most nations, for whom China is the largest trading partner, cannot be completely independent of it. Here lies the paradox, as trading with others is critical to increasing prosperity and competition and this, in turn, is critical for success in the military competition. Not unlike his predecessor, President Joe Biden is focused on investing in adjustment programs broadly understood to support the American working class but if that is done to the exclusion of the expansion of the global trading system and in particular America’s involvement in the global trading system then the US will have to endure losses. The Biden administration has made India one of its key planks of competing with China. But even as they are coming closer in geopolitical terms the economic partnership has flagged.
With a trade policy hobbled by protectionism, India has demonstrated an emphasis on manufacturing localisation on increasing exports while minimising inputs, the weaknesses of the intellectual property protections and like China an increasing desire to build India Indian champions especially in the digital space all of which reflects an obsession with self-reliance and policies that suggest discomfort with external trade openness. Ironically even as India is engaged in a very serious security competition with China, the bilateral trade has been moving on a positive trajectory. Bilateral trade between China and India might surpass the milestone of $100 billion in 2021 despite a cold political and diplomatic relationship between the two nations. So the desirability of taking advantage of opportunities China offers, while seeking to prevent Chinese hegemony continues to cause a conundrum. In order to take advantage of the shifting production platforms from high-wage to low-wage economies, India will have to provide facilitating policies.
The future points towards decoupling and massive uncertainty. Business leaders must be ready to navigate geopolitical risks, plan cautiously and invest more resources into boosting government relations and global trade trendss. There is a need for appropriately ambitious but globally coordinated action on the reduction of tensions in the sphere of global trade.