What We're Reading:
Where do sanctions on Russia go from here? A foreign policy expert weighs in. Russia's invasion of Ukraine has shown little sign of slowing in the face of intense sanctions, and as the war drags on the goal of the punitive measure is becoming less clear, according to one foreign policy expert. (NPR)
Inflation and rate hikes ahead: Bankers cautious on the economy. Wall Street's major banks and asset managers were cautious about the economy as they detailed how both consumers and institutional clients were struggling to deal with sky-high inflation and looming rate hikes. (US & World Report)
Anti-virus shutdowns in China spread as infections rise. Anti-virus controls that have shut down some of China’s biggest cities and fueled public irritation are spreading as infections rise, hurting a weak economy and prompting warnings of possible global shockwaves. (AP News)
Biden pushes congress on manufacturing bill to bolster competition with China. President Joe Biden urged Congress to pass legislation aimed at making the U.S. more competitive with China with provisions including $52 billion to bolster chip manufacturing. (Bloomberg)
Sri Lanka's foreign debt default: Why the island nation went under. A few years ago, Sri Lanka had a booming tourism industry and promising infrastructure projects that made global headlines. Now the country is broke. What went wrong? (DW)
Global trade needs more supply diversity, not less. Countries with trade partners that implemented more stringent lockdowns had a sharper drop in imports. Though trade flows have adjusted, more diversified global value chains could help lessen the impact of future shocks. (IMF)
How France’s presidential election could impact Ukraine war. The capital of France may be thousands of miles away from the battlefields of eastern Ukraine, but what happens in French voting stations this month could have repercussions there. (AP News)
USDOT supply chain tracker shows progress as supply chains remain stressed. Goods are being delivered to shelves and real retail inventories excluding autos are at their highest levels in history and 6% above pre-pandemic levels. (MH&L)
Amazon sellers hit with fuel, inflation surcharges: How much more will it cost? It will now cost Amazon’s (AMZN) third-party sellers more to use the e-commerce giant’s marketplace platform to sell their products to consumers as they have been hit with a 5% fuel and inflation surcharge. (International Business Times)
Analysis: Hawkish Fed and China lockdowns threaten Brazil's world-beating FX rally. The Brazilian currency's monster rally may soon run out of gas, analysts and government officials say, as U.S. interest rate hikes and risks to the Chinese economy threaten the fundamentals of the world's best-performing major currency. (Reuters)
Ukraine war is ‘massive setback’ for global economic recovery, says IMF chief. Russia’s invasion of Ukraine has caused a “massive setback” for the economic recovery from the coronavirus pandemic, said the head of the IMF, with lower growth and higher inflation expected in most countries. (Financial Times)
China rejects ‘pressure or coercion’ over Russia relations. China on Thursday said it would reject “any pressure or coercion” over its relationship with Russia, in response to a call from U.S. Treasury Secretary Janet Yellen for Beijing to use its “special relationship with Russia” to persuade Moscow to end the war in Ukraine. (AP News)
Persuading your team to embrace change. Leadership is about many things, some of them quite lofty: setting a strategic direction, creating a shared sense of purpose, modeling behaviors you hope to see in others. But effective leadership often boils down to something more mundane—getting people to do things they would rather not do. (Harvard Business Review)
Atradius Outlook Projects Continued Inflation Impacting Global GDP Growth
Bryan Mason, editorial associate
The global economy has been hit hard by Covid shutdowns, labor issues, supply chain bottlenecks and the Russia-Ukraine war. As a result, price increases for energy and other commodities have further fueled inflation, causing GDP growth forecasts to trend downward, according to Atradius in its April Interim Economic Outlook.
The global GDP growth outlook has decreased by 0.7 percentage points for 2022 and 0.4 percentage points for 2023, Atradius said. Overall GDP growth now sits at 3.4% for 2022 and 3.2% for 2023.
Advanced markets have experienced diminished growth, and inflationary prices have been accelerated by the Russia-Ukraine conflict, Atradius added. “Growth in the eurozone is expected to cool significantly in 2022.”
High prices for commodities will cause centrals banks to respond more aggressively to mitigate inflation. Central banks in the U.S., U.K. and the eurozone have begun tightening monetary policies, compared with emerging markets that began doing so in 2021, Atradius said. “Growth momentum for emerging market economies is weakening as fiscal and monetary support are being rapidly withdrawn.”
The U.S. and U.K. responded quickly with the Federal Reserve and Bank of England raising monetary policy rates in recent months to hinder further inflation.
Inflation will likely rise further this year, and the conflict between Russia and the Ukraine will only make it worse, Atradius said. The Russia-Ukraine conflict also has hindered global growth mainly due to its impact on commodity and energy prices.
However, forecasts remain volatile due to high levels of uncertainty, Atradius said. Some markets remain a concern following the outbreak of the war, including oil and gas, wheat, barley, vegetable oils and base metals. Despite supply bottlenecks showing signs of easing, shipping costs and equipment shortages are still high, Atradius said.
“Furthermore, the Russia-Ukraine conflict is distorting some specific supply chains, like that of semiconductors and the automotive industry,” the outlook states. “Trade growth remains relatively robust in 2022, however, as supply chain pressures and inflation are counterbalanced by strong consumer demand.”
With fiscal and monetary support dwindling, emerging markets are seeing its growth momentum diminish, Atradius said. While Russia’s invasion of the Ukraine has created more issues, impacts from new waves of Covid infections continue to be felt.
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French Presidential Election: An Uncertain Repeat Run-Off Between Macron and Le Pen
The first round of France’s presidential election saw the center-right incumbent Emmanuel Macron and Marine Le Pen take the top two places, as in 2017. The winner between the two candidates will be decided in the run-off election on April 24, in a vote that is likely to be much more uncertain than five years ago. The gap between the two candidates had narrowed significantly in the weeks leading up to the first round of the election. However, the incumbent remains favorite for re-election.
If Emmanuel Macron is re-elected, the next 5 years should be marked by continuity. His program includes the abolition of the contribution on the added value produced for companies (CVAE, EUR 10 billion), the end of the TV license fee (around EUR 4 billion) and the postponement of the legal retirement age from 62 to 65 (a reform that was put on hold because of the pandemic). In the context of inflationary pressures, Macron also proposes to continue to cap the rise in gas and electricity prices, to extend the rebate on fuel prices and to index pensions to inflation.
However, the election of Marine Le Pen cannot be ruled out. It would bring a negative reaction in financial markets and doubts about the European stability and cohesion. As illustrated by the fall in French stocks and rise in bond yields a few days before the first round, the election of Marine Le Pen can no longer be ruled out. Should this happen, a more negative reaction from the markets is expected, as they see the far-right candidate as less reliable in terms of public finances. Her program includes the bringing forward of the retirement age to 60 years for those who started working early (cost of EUR 26 billion), the reduction of VAT on energy (EUR 10 billion) and a government loan at zero interest to promote home ownership (EUR 13 billion).
On the revenue side, the bulk would come from several measures excluding foreigners from social benefits. Above all, her election would be seen as a threat to the European Union's political stability and cohesion. Marine Le Pen would challenge the EU by re-imposing border checks, reducing France’s net contribution to the EU’s budget and questioning the supremacy of EU law.
If Macron is re-elected, the legislative elections could be perilous for his party. Should he lose his parliamentary majority, then Macron will be forced to form a coalition government, which would increase the risk of political instability and reduce his ability to implement his program. Although parliamentary elections held just after the presidential elections have always offered a majority to the newly elected president, the situation could be different this time, especially in the event of a narrow victory.
Whatever the outcome, the French economy faces a highly adverse environment, the recovery being strongly constrained by the consequences of the war in Ukraine. The surge in commodity prices will bring inflation to its highest level in several decades, weighing on household consumption. At the same time, companies will suffer from substantial cost increases. Business investment is thus likely to be held back by both economic uncertainty and falling profits.
Uneven Recovery in Middle East and North Africa Ahead
Economies in the Middle East and North Africa (MENA) region are expected to grow by 5.2% in 2022, the fastest rate since 2016, on the back of oil-price windfalls benefitting the region’s oil exporters. But heightened uncertainty surrounds this forecast due to the war in Ukraine and ongoing threats from COVID-19 variants.
The World Bank’s latest economic update, Reality Check: Forecasting Growth in the Middle East and North Africa in Times of Uncertainty, forecasts an uneven recovery as regional averages mask broad differences. Oil-producers will benefit from higher oil prices and vaccination rates as fragile countries lag. But tighter global monetary policy, the unpredictability of the course of the pandemic, ongoing supply chain disruptions and food price hikes raise inflation risks for the entire region.
Currency depreciation in some countries in MENA is already adding to inflationary pressures. Economies facing fiscal and debt vulnerabilities will likely encounter more challenges as they roll over existing debt, or issue new debt amid tighter financing conditions as global central banks aim to contain inflation expectations.
Inflationary pressures created by the pandemic have been exacerbated by the Ukraine war. Countries in the MENA region rely heavily on food imports, including wheat from Russia and Ukraine. The rise in food prices and the higher risk of food insecurity are likely to hurt poor families the most because the poor tend to spend more of their household budget on food and energy than do rich households. The full extent of the consequences of the war are yet to be determined, but early signs point to a heightening of the economic difficulties already besetting MENA economies, particularly oil-importing middle-income countries.
Despite the projected growth rate of 5.2%, GDP per capita, an indicator of people’s living standards, will barely exceed pre-pandemic levels due to a generally lackluster performance in 2020-2021, the report said. In Gulf Cooperation Council countries, buoyed by the increase in oil prices, GDP per capita is projected to grow by 4.5% in 2022, but will not recover to pre-pandemic levels until 2023. In contrast, in 2022, GDP per capita of middle-income oil exporters is projected to grow by 3.0%, and by 2.4% for the region’s oil importers, both barely lifting living standards above pre-pandemic levels. Overall, if these forecasts materialize, 11 out of 17 economies in MENA may not recover to pre-pandemic levels by end of 2022.
Adding to pandemic-related uncertainty, only a third of the middle-income MENA countries have higher vaccination rates than their income peers. As of April 4, 2022, Gulf countries, excluding Oman which has a 57.8% vaccination rate, have an average rate of 75.7%, which is far better than their income peers. But countries like Algeria and Iraq have vaccinated around 13 to 17% of their populations and Yemen and Syria have vaccination rates in the single digits, thus leaving them more exposed to the economic and health consequences of Covid-19 in the near future.
Each MENA economic update chooses a special focus area, and this April’s edition provides a reality check on growth forecasts over the past decade, including those provided by the World Bank, the International Monetary Fund, and the private sector. The authors found that growth forecasts in the MENA region over the past decade were often inaccurate and overly optimistic when compared to those of other regions. Overly optimistic forecasts can lead to economic contractions down the road. A key driver of forecast uncertainty is the availability and accessibility of quality and timely information, an area where MENA lags behind the rest of the developing world.
Conflict economies such as Libya and Yemen have outdated GDP data, last available for 2014 and 2017 respectively. Only 10 out of the 19 MENA economies covered by the World Bank Group have monthly or quarterly information on industrial production; for the remaining nine, information is not publicly available; and none publish monthly unemployment data. The report provides guidance about how to improve national data systems.
Week in Review Editorial Team:
Diana Mota, Editor in Chief
Annacaroline Caruso and Bryan Mason, Editorial Associates