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What We're Reading:

Fed dials back bond purchases, plots end to stimulus by June. The Federal Reserve closed a chapter on its aggressive, pandemic-driven stimulus when it approved plans Wednesday to begin scaling back its bond-buying program this month amid concerns that inflationary pressures could last longer than officials expected earlier this year. (WSJ)

US, EU reach agreement to ease steel and aluminum tariffs. The United States will lift tariffs on some steel and aluminum imports coming from Europe beginning Dec. 1 as part of an agreement to ease trade tensions between the two. (Construction Dive)

US mandates vaccines or tests for big companies by Jan. 4. Tens of millions of Americans who work at companies with 100 or more employees will need to be fully vaccinated against COVID-19 by Jan. 4 or get tested for the virus weekly under government rules issued Thursday. (AP News)

World leaders seek ways to strengthen global supply chains. U.S. President Joe Biden and 16 other world leaders discussed action to make supply chains more resilient in the face of any future health crises, as well as climate change and even planned attacks. (Reuters)

Shortages in semiconductors, shipping to persist for months. The shortages in semiconductors and shipping that has done so much to disrupt production of automobiles and other goods could persist for months, an economist with CNBC said on Tuesday. (HSN)

Leaders vow to protect forests, plug methane leaks at COP26. World leaders promised to protect Earth’s forests, cut methane emissions and help South Africa wean itself off coal at the UN climate summit Tuesday—part of a flurry of deals intended to avert catastrophic global warming. (Business Mirror)

Aluminum makers warn power cuts in China could cause magnesium shortages. A shortage of magnesium could curtail future production of the aluminum alloys used to make the metals in everything from car parts to food packaging, aluminum makers warned in earnings calls. (Supply Chain Dive)

Public finance institutions pledge to end fossil fuel support by end of 2022. A group of governments and public finance institutions across the world, including in the US, European Union, Canada and UK, have pledged to end direct support for the unabated fossil fuel energy sector by the end of next year. (Global Trade Review)

G20 endorses a global minimum tax, but falls short on climate change. Leaders at the G20 Summit in Rome formally backed a 15% global minimum tax, arguably the only concrete outcome from the summit alongside discussions on climate change and debt relief. (ITR)

Real negotiations begin at UN climate conference. For the next 10 days, maybe more, the professional diplomats at the crowded United Nations climate conference must convert marching orders left by their heads of government into compromises and agreements. (Business Mirror)

‘Yeah, we’re spooked’: AI starting to have big real-world impact, says expert. A scientist who wrote a leading textbook on artificial intelligence has said experts are “spooked” by their own success in the field, comparing the advance of AI to the development of the atom bomb. (Guardian)

Outlooks for financial institutions ratings continue to stabilize. The number of Negative Outlooks and Watches on global financial institutions’ (FIs) ratings continued to decline in 3Q21, signaling that pressure from the pandemic is receding, Fitch Ratings says in a new report. (Fitch)

The Taliban banned foreign currencies as Afghanistan nears financial collapse with billions frozen overseas. The Taliban banned the use of foreign currencies in Afghanistan, which is on the brink of financial collapse after the group ousted the previous government. (Business Insider)

Central banks head for stimulus exit, but some take the slow lane. A great central bank exit from the extraordinary stimulus unleashed to keep economies afloat during the COVID-19 pandemic is underway, with the United States and Australia this week moving away from hefty policy support. (Reuters)

France and Britain defuse fishing row with 'positive' talks. France and Britain moved to defuse their dispute over fishing on Thursday, with sanctions off the table for now but all options still possible should talks fail, French European Affairs Minister Clement Beaune said. (US News and World Report)

As fiscal support is phased out, global corporate insolvencies are forecast to increase by 33% in 2022, according to trade credit insurer, Atradius. In 2020, global insolvencies dropped 14%, and a 1% decline is expected for 2021— “a significant downward adjust compared to our forecast in early 2021,” the firm noted.

“The still low level of business failures this year is owing to the extension of fiscal measures in many countries, and in some cases also due to the continuation of insolvency law amendments,” Atradius said. “On a regional level, we see rising insolvencies in Europe in 2021, while the trend is positive (downwards) in North America and in the Asia-Pacific region.”

Insolvencies were “much” lower in most markets: 51% in South Korea, 47% in Singapore, and 44% in Australia. “This suggests that fiscal support packages (and in the case of Australia and Singapore also significant adjustments to legal frameworks) have been particularly effective,” Atradius explained. “The sharp decreases in most countries also suggest that that potentially many so-called ‘zombie companies’ have been created. The term is loosely defined here as companies that may not survive once economic circumstances return to normal, as their financial situation is too weak. That said, due to low interest rates, they may survive for some time at least.”

In most markets, compared with pre-pandemic levels, insolvencies will appear elevated by the end of 2022, the firm noted. “This can be largely attributed to bankruptcies of businesses that were ‘saved’ by government support in 2020, and the return of insolvencies to ‘normal’ levels. In some cases, a slow economic recovery additionally contributes to higher insolvencies.”

Atradius expects the highest cumulative insolvency growth in 2021 and 2022 compared to pre-pandemic levels in Italy (34%), the United Kingdom (33%) and Australia (33%). In 2022, the highest rise in insolvencies is expected in Asia-Pacific, and “somewhat lower” increases in Europe and North America.

“In Australia the increase occurs mainly in 2022 due to the expiry of fiscal support towards the end of 2021,” Atradius said.” In Italy and the United Kingdom, the increase is distributed over both 2021 and 2022, but the highest increase takes place in 2022.”

Beyond 2022, Atradius expects insolvencies to decline or remain constant. “This is because insolvency levels will have largely returned to normal and zombie firms that are not able to survive without support, have gone bankrupt already,” the firm said. 

The trade credit insurer cautioned that the Delta variant and the fallout from supply chain disruptions could alter its forecast.

The global economy is set for another year of above-potential recovery growth in 2022, after expanding by a robust 5.1% in 2021, according to The Conference Board, in its series of reports, Global Economic Outlook 2022: From Pandemic Downturn to Growth Revival. 

The Conference Board is a member-driven think tank that delivers insights for what's ahead. The reports include 2022–2031 GDP projections for key economies across Asia, Europe, the Americas, the Gulf Region and beyond.

Global GDP—which contracted by an unprecedented 3.3% in 2020—is calculated to have recovered all of its losses by Q1 2021. By the end of 2022, 66 out of 77 key economies, representing 96% of global GDP, should be at or above pre-pandemic output levels, though labor market and income recovery will lag somewhat. 

"Now the hard work begins for businesses and policymakers," said Dana Peterson, chief economist of The Conference Board. "Lessons learned in resilience and surviving disruption during the pandemic will become increasingly relevant in the decade ahead, amid a new mix of challenges—including some trends catalyzed by the pandemic and others that predated it. Also, an evolution in the ways that we consume and work, including developments like telehealth and remote work, can potentially increase the productive capacity of the global economy and promote growth."

The Conference Board currently projects 3.9% global growth in 2022. Annual global growth is projected to average 2.5% in the years 2022-2026—down from 3.3% across the decade 2010–2019—before ticking down further to 2.4% in 2027–2031. Emerging and developing economies are expected to contribute to roughly 70% of the growth rate over the next decade and mature economies the other 30%—similar to their respective shares in 2010–2019.

Challenges ahead include:

• Potential higher financing costs.
• Heightened financial market volatility.
• Inflation risks driven by rebounding growth.
• Supply-chain bottlenecks.
• Ongoing labor shortages.

"In this environment, harnessing the benefits from digital transformation strategies and upskilling workforces, should drive productivity growth through innovation and efficiency gains," said Klaas de Vries, economist at The Conference Board.

"The challenge for most businesses in the decade ahead will be to implement growth strategies based on innovation and efficiency gains during a period of renewed labor shortages and tightening of monetary policy by major central banks in response to substantial inflation risks, which will impact costs of accessing capital, added Ataman Ozyildirim, senior director of economics. “Businesses need to focus on both tangible and intangible investments to drive sustainable growth strategies."

Among the critical long-term trends driving this forecast:

• A decline in quantitative growth drivers as populations age worldwide. The global economy in recent decades has been boosted to a large extent by quantitative, or tangible, growth factors—most notably, rapid industrialization in large emerging economies that brought surging numbers of new workers and capital into the world economy. As the overall global population ages rapidly—and China turns to less capital-intensive service sectors—these easy drivers of growth will be harder to find in the 2020s.
• Qualitative growth drivers won't be enough to fill the gap—but a productivity revival may surprise on the upside. Over the next decade, qualitative factors, or intangible drivers—such as higher productivity, new technologies, and improved education and upskilling—will become increasingly predominant drivers of global growth. While not enough to replace the contributions of the quantitative growth drivers that dominated the 2010s, a productivity revival may be within reach, especially in wealthy advanced markets. Across these mature economies, total factor productivity (TFP) is likely to rise by 0.4% on average annually over 2022–2031, after remaining stagnant over the past 20 years. (TFP refers to the productivity of all inputs taken together and captures the role of efficiency and innovation in growing output.) This may be a surprising legacy of COVID-19, as the pandemic helped accelerate the diffusion of new technologies for work and consumption. The full productive potential of AI, ICT (information and communication technology), robotics, 3D printing, and more may finally be realized in the years to come.
• A further slide toward deglobalization risks acting as a drag on growth and productivity. Recent data suggest economic globalization—encompassing trade regulations, tariffs, capital account openness, foreign investment, and more—may have peaked in the early 2000s, and entered an accelerated decline in recent years. Brexit, trade wars, and tightened immigration policies all point to stalled momentum for the globalization of markets and competition, which could exacerbate supply-chain costs for years to come. As a lagging sign, the share of foreign content in manufacturing production—which soared from 17.3% in 1995 to 26.5% in 2011—had already retreated to 23.5% in 2020.
• Inflation may be structurally higher in the coming decade(s), due to a perfect storm of demography, deglobalization, and China's inward turn. While the pandemic set off the current period of inflation concerns, the long-term trends above may coalesce in an extended period of steadily rising prices. Aging populations and slower labor-supply growth puts workers in a position to bargain for higher wages while growing the share of retirees per worker, which is inflationary by definition. Meanwhile, deglobalization and China's new focus on domestic political retrenchment over rapid growth raises the risk of higher inflation becoming structural globally, as the price stability consumers, markets, and governments assumed over the past generation is eroded.

World exports of intermediate goods (IG), such as parts and components, rose by 47% in the second quarter of 2021, compared with Q2 2020, according to a new WTO quarterly report, which helps track the health of global supply chains. The increase sustains the upward trend in IG exports recorded in the first quarter (20%), during which IGs trade from most top exporters largely exceeded 2019 pre-pandemic levels.

IGs are inputs used to produce a final product. They range from crops used in food production to textiles and metals needed to manufacture goods. Trade in intermediate goods is an indicator of the activity in supply chains, which was severely impacted in the early stages of the COVID-19 crisis. The share of IG in total trade (excluding fuels) in Q2 2021 was 52%, a ratio that remained constant over the last decade.

Africa recorded the highest growth in IG exports (88%), mainly due to strong jumps in exports of precious metals and stones such as rhodium, diamonds, copper/copper cathodes and iron ore concentrates. South and Central America recorded a 53% increase, also related to a strong rise in exports of primary commodities such as iron and copper ores.

China maintained high growth in supply and demand of international inputs (more than 40% in Q2 2021), while the largest increases were recorded for Australia's IG exports (74%)—mainly due to exports of iron ore concentrates (101% in Q2) and wheat and meslin (183%)—and India's imports (119%), essentially linked to non-monetary gold (1,034%), non-industrial raw diamonds (896%) and integrated circuits (333%).

Exports of transport equipment rose the highest in Q2 2021, by 69%. This is mainly a recovery from a low base after the strong decline observed for the sector in Q2 2020—the automotive industry suffered the most in terms of effects on demand and supply chains during the peak of the pandemic.

Exports of food and beverages increased the least in Q2 2021, by 29%. Unlike other industries, the food sector did not show a marked slowdown in Q2 2020.

 

Week in Review Editorial Team:

Diana Mota, Editor in Chief and David Anderson, Member Relations