What We're Reading:

Kremlin demands rubles for gas, leaves currency loophole. Russian President Vladimir Putin issued a decree Thursday demanding payment for natural gas in rubles but appeared to temper the order by allowing dollar and euro payments through a designated bank, the latest twist over energy supplies that Europe relies on to heat homes and generate electricity. (AP News)

World is seeing the greatest number of conflicts since the end of WWII, UN says. An estimated 84 million people were “forcibly displaced because of conflict, violence and human rights violations,” and an estimated 274 million people will need humanitarian assistance due to conflict. (NPR)

Analysis: End of an era in sight as euro area borrowing costs sweep above 0%. More attractive returns could bring investors back to the region and boost the euro, while easing strains on banks and pension funds. Likely losers include riskier emerging and corporate bonds that were snapped up in a hunt for returns. (Reuters)

A key inflation gauge sets 40-year high as gas and food soar. An inflation gauge that is closely monitored by the Federal Reserve jumped 6.4% in February compared with a year ago, with sharply higher prices for food, gasoline and other necessities squeezing Americans’ finances. (AP News)

China’s growth forecasts cut as covid lockdowns spread. China’s economy is coming under strain because of an escalating Covid outbreak, with economists warning of a deeper slowdown if lockdowns in Shanghai and elsewhere continue to expand. (Bloomberg)

In Congo, China hits roadblock in global race for cobalt. For more than a decade, Chinese companies have spent billions of dollars buying out U.S. and European miners in the Democratic Republic of Congo’s cobalt belt—the world’s richest source of a mineral that has become critical to the global transition to cleaner energy. Now the Chinese firms are running into trouble after a court ordered one of the largest to temporarily cede control of one of its mines. (WSJ)

Duty drawback on exports: What you need to know. Duty drawback is one of the least understood and most underutilized benefits available to exporters. (Shipping Solutions)

Autonomous trucks market is expected to grow 16% over next 5 years. With a large driver shortage, the self-driving truck is an option more companies are using. (MH&L)

Chinese officials see dramatic drop in job security under Xi. Leaders of China’s provinces have less job security than at any time in the past four decades, a sign of the upheaval caused by President Xi Jinping’s anti-corruption campaign. (Business Mirror)

India to buy Russian oil at discount amid Ukraine war. As the U.S. and its Western allies move to reduce Russian oil imports, India is heading in the other direction. (WSJ)

Germany inflation hits 30-year high at 7.3%, growth outlook dims. Inflation in Germany jumped to a record high since reunification in 1990. Growth expectations have been slashed amid fears the Ukraine conflict will hit Europe’s biggest economy hard. (DW)

Analysis: US stocks, bonds flash diverging signals as volatile first quarter ends. With the first quarter of 2022 nearly over, the U.S. stock and bond markets appear to be conveying drastically different assessments of the growth outlook, leaving investors to decide which view will prevail. (Reuters)

How to be a supportive manager when times are tough. It’s never easy to manage people through tough times. But when the news is disturbing, and you know your team’s minds are understandably elsewhere, it can be particularly hard to know how to best support your people. (Harvard Business Review)

Russia’s invasion of the Ukraine has created a large shift in global financial order. Commodity prices have skyrocketed, currencies have depreciated and less globalization may follow.

Oil prices have increased dramatically considering Russia is the world’s second-largest oil distributor, said Sergio Rebelo, professor of international finance at Kellogg School of Management, during a Kellogg Insight webinar, The Insightful Leader Live: Russia, Ukraine and the Global Economy. Food prices also rose because Russia and the Ukraine account for roughly 25% of the world’s wheat production. Prices for other commodities like palladium, nickel and fertilizer also saw exponential increases.

“We’re seeing expectations for inflation rising as a result,” Rebelo said. This affects all of the components of the consumer price index in the U.S. Additionally, with labor shortages still prominent, the Fed may worry that inflation will get out of control, so the response would be to raise interest rates, he said.

As the U.S. currently represents about 16% of the global economy, Rebelo predicts there will be more balance among economic superpowers moving forward. Countries such as China, those in Europe and some others will likely take on larger shares of global GDP. There also may be more issues arising in the U.S. For example, political polarization recently has become a prominent issue affecting unity within the country, he continued.

The U.S. dollar, however, is still widely used in the global economy. “The dollar accounts for 60% of foreign exchange reserves,” Rebelo said.

The Russian ruble recently faced tremendous depreciation due to the sanctions imposed on Russia’s economy, Rebelo said. “That means many things being imported into Russia will become more expensive.” Because Russia was a large distributor of oil, Rebelo expects the world will use more coal as a short-term solution.

Russia also is suffering from citizens emigrating out of the country due to the war, Rebelo said. “Highly educated people are leaving Russia.”

In fact, 43% of the people emigrating out of Russia have obtained higher levels of education like a master’s or a Ph.D., he continued. “Russia is really losing a lot of people that can modernize its economy and reduce its dependency on oil and gas.”

In addition, cyberwarfare will become a bigger problem in the future, Rebelo said. The industries affected the most by ransomware attacks have been manufacturing, financial services and transportation.

This could lead to companies wanting to produce closer to home, Rebelo said. This will lead to less interest in global trade. “We are seeing the end of globalization, he added.

As it stands, the current war is expected to decrease global GDP growth by 1% and increase global inflation by 2.5%, Rebelo said.

Financial executives are expressing fears of Russian cyber-attacks on SWIFT after several of the country’s biggest banks were removed from the payments messaging system.

As The Financial Times reported Tuesday (March 15), a number of senior executives overseeing cyber security at major banks say the threats to SWIFT, which allows thousands of banks to send trillions in international payments each day, will grow if more Russian lenders are barred from the system.

Russia’s second-largest bank, VTB, is among the financial institutions removed from SWIFT earlier this month as part of the sanctions against Moscow in retaliation for the invasion of Ukraine. So far, Sberbank—the country’ largest bank—and Gazprombank have been allowed to stay on SWIFT, as they handle much of the payments for Russia’s gas and oil exports.

The FT report said executives worry SWIFT will become a more attractive target than individual banks, as it serves so much of the worldwide financial system.

“There are lots of concerns about Swift,” a financial regulator that supervises some of the banks said. “Banks seem to be comfortable with their own cyber security levels, but a hit to Swift would be very detrimental to the whole banking system.”

The extent of Russia’s cyber-attacks so far has been limited to government and infrastructure inside Ukraine. Banks, however, are still on alert.

“During warfare, it’s the most effective place to hit—it’s the nucleus of the global banking system, the node that connects everything,” said one senior bank executive.

Earlier this month, PYMNTS reported that a number of major American banks — J.P. Morgan, Citigroup, Bank of America and Goldman Sachs—had seen an increased level of cyber-attacks in the wake of Russia’s invasion of Ukraine.

Executives at these banks said that while they’ve spent billions each year to stave off these attacks, the recent wave of is different: subtle-yet-intensified attacks on banks’ technological infrastructure that commenced after the sanctions were announced.

Reprinted with permission by PYMNT.com.

By late 2021, there were 50% to 80% more unfilled jobs in Australia, Canada, the United Kingdom and the United States than there were prior to the pandemic. Open vacancies were at or above their 2019 levels in other advanced economies too, and have risen steadily across all sectors, including those that are more contact-intensive such as hospitality and transportation. Increases in vacancies have been largest for low-skilled jobs.

The sharp rise in unfilled vacancies partly reflects how strong the economic recovery in advanced economies had been until the start of the Ukraine crisis, with firms recruiting en masse to cope with booming demand.

But, as a new IMF Study shows, this is just one part of the story.

Why Aren’t Vacancies Being Filled?

Vacancies have been hard to fill for several reasons, some of which were outlined in a previous blog. One is health concerns related to the pandemic. Because of these, some older and lower-skilled workers previously employed in contact-intensive industries remain outside of the labor force, shrinking the pool of available job seekers.

In the median advanced country, low-skilled workers account for over two-thirds of the gap between aggregate employment and its pre-pandemic trend. Older workers, as a group, contribute about one-third of this employment gap. In some countries such as Canada and the United Kingdom, the decline in immigration also seems to have amplified labor shortages among low-skill jobs.

Another reason why vacant jobs have been hard to fill is that Covid-19 may well have changed workers’ job preferences. In the United States, resignations have risen beyond what their historical relationship with vacancies would imply, suggesting that workers are not just seizing opportunities in a hot labor market but also searching for better working conditions. In the United Kingdom, resignations have risen the most for low-wage jobs that are contact-intensive, physically strenuous or offer little flexibility, such as in transport and storage, wholesale and retail trade, or hotels and restaurants.

Impact on Wage Growth and Inflation

Labor market tightness (as measured by the ratio of vacancies to the number of unemployed workers) has pushed up wage growth across the board. But the impact on wage growth in low-wage sectors has been over twice as large, at least in the United States and United Kingdom. This is because wages are over twice as responsive to tightness in low-pay industries, which have also seen larger increases in tightness than other industries. We estimate that the annual growth rate of nominal wages in low-pay industries increased by 4 to 6 percentage points between mid-2020 and late 2021 because of rising labor market tightness, helping reduce wage inequality in some countries. However, on average, these pay gains have not yet resulted in additional spending power due to higher price inflation.

The overall impact of increased tightness on wage inflation has been more moderate so far, at least 1.5 percentage points in both countries. This is partly because of the small overall share of low-pay industries (and jobs) in total labor costs.

Insofar as labor market tightness persists, it is likely to keep overall nominal wage growth strong going forward. The impact on inflation is expected to be manageable unless workers start to demand higher compensation in response to recent price hikes and/or inflation expectations rise. Central banks should continue to signal their strong commitment to avoid any such price-wage spirals.

Policies Can Help Bring Workers Back

Curbing Covid-19 outbreaks would enable older and low-wage workers to reenter the labor force, thereby easing labor market pressures and inflation risks. Keeping schools and daycares open will also be important for women with young children to fully get back to work.

Well-designed active labor market policies could also speed up job matching, including through short-term training programs that help workers build the skills required for new fast-growing digital-intensive occupations, such as technology and e-commerce, or more traditional jobs that have experienced acute shortages, such as truck drivers or care workers. To accommodate shifting worker’s preferences, labor laws and regulations also need to facilitate telework. And where the decline in immigration amplifies labor shortages, its resumption could further “grease the wheels” of the labor market.

Tighter labor markets in several advanced economies have been good news so far. They have increased pay, especially for low-wage workers, with a manageable impact on price inflation (the surge has predominantly been driven by other factors). But some workers who left during the pandemic have yet to return, while others have lingering concerns about their current jobs and new expectations, restricting labor supply. By doing more to help these workers, governments can make the labor market recovery more inclusive while curbing inflation risks.

Reprinted with permission by IMF Blog.

 

Week in Review Editorial Team:

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

Annacaroline Caruso and Bryan Mason, Editorial Associates