What We're Reading:

What We're Reading:

European Central Bank makes largest-ever interest rate hike. The European Central Bank made its largest-ever interest rate increase last week, following the U.S. Federal Reserve and other central banks in a global stampede of rapid rate hikes meant to snuff out the inflation that is squeezing consumers and pushing Europe toward recession. (AP)

Queen Elizabeth’s death comes at moment of uncertainty for Britain. Queen Elizabeth II, whose seven-decade reign made her the only sovereign that most Britons had ever known, died on Thursday at her summer estate in Scotland, thrusting a bereaved country into a momentous transition at a time of political and economic upheaval. (New York Times)

Oil settles below $90 as recession fears mount. Oil prices settled sharply lower, slumping below levels seen prior to Russia's invasion of Ukraine as downbeat Chinese trade data fed investor worries about recession risks. (Reuters)

Truss: UK to cap domestic energy prices, end fracking ban. New British Prime Minister Liz Truss announced her Conservative government will cap domestic energy prices for homes and businesses to ease a cost-of-living crisis that has left residents across the United Kingdom facing a bleak winter. (AP)

Energy bills: Tens of thousands of firms 'face collapse' without help. Tens of thousands of businesses are at risk of going under without government support because of soaring energy bills, according to insolvency experts. (BBC)

FBX Index: The pace of decline increases. August is typically an element of the strongest part of peak season, yet 2022 does not have any material peak season. As a consequence, the slide in spot rates not only continued, but the pace of the decline also increased. (HSN)

Ukraine energy chief: Russia trying to ‘steal’ nuclear plant. The head of Ukraine’s atomic energy operator accused Russia of trying to “steal” Europe’s largest nuclear plant by cutting it off from the Ukrainian electricity grid and leaving it on the brink of a radiation disaster. (AP)

Climate change: Europe's warm summer shatters records. A series of extreme heatwaves and a long running drought saw June, July and August shatter the previous high mark for temperature. (BBC)

Summer is over. And the battle to get workers back to the office is heating up. But now that summer vacations and Labor Day are behind us, more employers may start taking a harder line. Just how tough companies will get remains an open question, though. (CNN)

Mortgage rates reach highest level since 2008. Mortgage rates reached their highest level since 2008, inching closer to 6%, as it became clearer to investors that aggressive rate hikes from the Federal Reserve would continue. (CNN)

Mining the ‘messy middle’ of data analytics. What’s usually missing is the part in the middle that connects the raw data with those fancy presentations. It’s an ugly part of the process that involves cleansing, categorizing and standardizing data, and one that often flies under the radar because it lacks the excitement and obvious returns of other investments. But it also provides crucial insights from high-quality, relevant data that increasingly mark the difference between success and failure. (IndustryWeek)

US launches Asia economic forum to counter China. The United States began a series of meetings with ministers from the Asia-Pacific in Los Angeles on Thursday at an economic summit aimed at countering China's growing influence in the region. (Barron’s)

After record floods, now Pakistan has to worry about economy. The rain has destroyed vast hectares of crops, including cotton, a key source of employment and forex for the nation. (Aljazeera)

Pound in biggest monthly fall against the dollar since 2016. Worries over the prospects for the UK economy led the pound to slide by about 5% against the US dollar in August. The last time the pound fell so much against the dollar was in October 2016, in the aftermath of the Brexit vote. (BBC)

The latest WTO Goods Trade Barometer was steady but below the recent trend line for merchandise trade, suggesting that global goods trade continued to grow in the second quarter of 2022 but that the pace of growth was slower than in Q1 and is likely to remain weak in the second half of the year.

The Goods Trade Barometer is a composite leading indicator for world trade, providing real-time information on the trajectory of merchandise trade relative to recent trends. The latest reading of 100.0 coincides exactly with the baseline value of the index, indicating on-trend trade expansion.

However, the overall barometer remains below a companion index representing actual merchandise trade volumes, suggesting that year-on-year trade growth may slow further but remain positive when official Q2 statistics become available, with trade simultaneously weighed down by the conflict in Ukraine and buoyed by the lifting of COVID-19 lockdowns in China.

The volume of world merchandise trade plateaued with year-on-year growth slowing to 3.2% the first quarter of 2022, down from 5.7% in fourth quarter of 2021. The slowdown in Q1 only partly reflected the impact of the conflict in Ukraine, which broke out in late February. Lockdowns in China also weighed heavily on trade in the first quarter. 

The components of the goods barometer are a mixed bag, with most indices showing on trend or below trend growth. The forward-looking export orders index (100.1) is on trend but has turned downwards. The automotive products index (99.0) is only slightly below trend but has lost its upward momentum. Indices for air freight (96.9) and electronic components (95.6) are below trend and pointing down, while the raw materials index (101.0) has recently risen slightly above trend. The main exception is the container shipping index (103.2), which has risen firmly above trend as shipments through Chinese ports have increased with the easing of COVID-19 restrictions.

The latest barometer reading is consistent with the WTO's most recent trade forecast from last April, which predicted 3.0% growth in the volume of world merchandise trade in 2022. However, uncertainty surrounding the forecast has increased due to the ongoing conflict in Ukraine, rising inflationary pressures and expected monetary policy tightening in advanced economies. A revised forecast will to be issued in early October.

The full Goods Trade Barometer is available here.

Further details on the methodology are contained in the technical note here.

Russia’s war of aggression against Ukraine has caused lower global growth and higher inflation, with negative impacts on business investment and private consumption.

The OECD Employment Outlook 2022 says that while labor markets remain tight in most OECD countries, lower global growth means employment growth is also likely to slow, while major hikes in energy and commodity prices are generating a cost-of-living crisis.

Since the low point of the pandemic in April 2020, OECD countries have created about 66 million jobs, 9 million more than those destroyed in a few months at the onset of the pandemic.

The OECD unemployment rate stabilized at 4.9% in July 2022, 0.4 points below its pre-pandemic level recorded in February 2020 and at its lowest level since the start of the series in 2001.

The number of unemployed workers in the OECD continued to fall in July and reached 33 million, 2.4 million less than before the pandemic.

Looking at individual countries however, the unemployment rate in July remained higher than before the pandemic in one fifth of OECD countries. In a number of countries, labor force participation and employment rates are also still below pre-crisis levels. Moreover, employment is growing more strongly in high pay service industries, while it remains below pre-pandemic levels in many low pay, contact-intensive industries.

“Rising food and energy prices are taking a heavy toll, in particular on low-income households,” OECD Secretary-General Mathias Cormann said. “Despite widespread labor shortages, real wages growth is not keeping pace with the current high rates of inflation. In this context, governments should consider well targeted, means-tested and temporary support measures. This would help cushion the impact on households and businesses most in need, while limiting inflation impacts and fiscal cost of that policy support,” he said.

Tight labor market conditions mean that companies across the OECD are confronted with unprecedented labor shortages. In the European Union, almost three in 10 manufacturing and service firms reported production constraints in the second quarter of 2022 due to a lack of labor.

Nominal wages are not keeping pace with the rapid rise in inflation. The real value of wages is expected to decline over the course of 2022, as inflation is projected to remain high and generally well above the level expected at the time of relevant collective agreements for 2022. The cost-of-living crisis is affecting lower-income households disproportionally. They have to devote a significantly larger share of their incomes on energy and food than other groups and were also the population segment falling behind in the jobs recovery from the COVID-19 pandemic.

In these circumstances, supporting real wages for low-paid workers is essential, according to the report. Governments should consider ways to adjust statutory minimum wages to maintain effective purchasing power for low paid workers. Targeted, means-tested and temporary social transfers to people most affected by energy and food price hikes would also help support the living standards of the most vulnerable.

In the current circumstances, active discussions between governments, workers and firms on wages will also be key. None of them can absorb the full cost associated with the hike in energy and commodity prices alone. This calls for giving new impetus to collective bargaining, and for rebalancing bargaining power between employers and workers, enabling workers to bargain their wage on a level playing field.

Countries should step up their efforts to reconnect the low-skilled and other vulnerable groups to available jobs. About two-thirds of OECD countries have increased their budget for public employment services since the onset of the COVID 19 crisis. However, more funding is not enough: employment and training services need to be integrated, comprehensive and effective in reaching out to employers and job seekers.

Improving job quality for frontline jobs should be an urgent priority for governments. More than half of OECD countries set up one-time rewards to compensate workers in the long-term care sector for extra work during the pandemic. Yet less than 30% of countries have increased pay on an ongoing basis.

Nearly six months into Russia’s invasion of Ukraine, the conflict’s long-term impact is coming into focus. The conflict prompted many multinational corporations to voluntarily exit or sever business ties with Russia and triggered a broad set of international sanctions. Now, much of the focus has shifted from specific developments in Ukraine and Russia to economic inflation globally and a fracturing geopolitical order.

Businesses and governments should not lose sight of the indirect consequences of the Russia-Ukraine conflict, which may persist for a long time. This includes the continuing risk arising from the large volume of new economic, financial and trade sanctions; the global impact arising from the reduced availability of key commodities such as oil, fertilizer and grain; and potential insurance claims made as a result of the conflict.

Claims under political risk and trade credit insurance policies typically take time to develop; the volume of claims associated with the conflict is nearly certain to increase, although that remains to be seen. Below is an industry-level look at how the conflict is introducing new risks to business operations and impacting insurance as a result.

Energy and Power

The energy insurance market is seeing an immediate impact on its premium volume due to sanctions on Russian oil and EU attempts to reduce reliance on Russian energy. As of December 2021, Russia accounted for nearly 10% of world petroleum production. Germany and other EU members that previously bought Russian natural gas and oil are trying to line up alternative energy supplies, including possibly delaying original coal phase-out plans or revamping already shutdown coal power plants (when feasible). Meeting power demand may increase the need for new upstream energy investments and energy infrastructure outside of Russia.

EU sanctions prohibiting EU companies from insuring any Russian oil shipment are due to fully come into effect by the December 5, 2022, raising concerns of even higher energy prices. The U.K. has so far held back on a similar ban, only restricting imports into the U.K. from the end of the year. Changes to U.K. and EU positions depend on the outcome of a U.S. attempt to gain international agreement on an oil price cap, which would allow insurance for oil shipments under a certain price.

One of the long-term consequences of the Russia-Ukraine conflict is the acceleration of the transition to renewable energy sources. Energy market observers forecast that mature economies are entering a “capex supercycle” in which capital expenditures to support the transition to a lower-carbon economy are expected to be enormous. That shift is likely to increase demand for insurance coverage for these new industries.

Credit and Political Risk

Claims are beginning to emerge for Russian and Ukrainian trade credit, political risk, and structured credit policies issued before sanctions were imposed. More trade credit and structured credit claims for Russia are anticipated in the second half of 2022 and the first quarter of 2023. Political risk claims are expected from Russia in the fourth quarter of 2022 and through 2023. 

Significant political risk claims for war and confiscation in Ukraine have emerged. Since late February, few—if any—new political risk or credit insurance policies have been available for Russia, Ukraine or Belarus.

The Russia-Ukraine conflict underlines the increased volatility in geopolitics in recent years, which creates complexity for managing risk in supply chains and in evaluating the cost of that risk. This is increasing demand for trade credit, political risk, and structured credit insurance to respond to the heightened risk environment and to secure liquidity and reduce capital costs.

Sanctions and Supply Chain Shifts

Sanctions and trade controls have significantly increased. While media reporting has focused on the aviation and marine industry, sanctions have impacted a large variety of goods and services being supplied to Russia.

Companies need to keep up with regular changes to sanctions, the differences in sanctions regimes between the EU, U.K., and U.S., as well as other countries joining the effort such as Singapore, Australia and Canada. This increases the complexity for international companies looking at which sanctions may apply in all the different countries in which they operate.

Many companies are also seeking new suppliers, points of manufacture, and routes of shipment. A major shift in thinking is taking place, from “just in time” supply chain deliveries to “just in case” supply chain risk management. The combination of these issues with geopolitics and inflation means that values at risk have increased in less well-known locations, often with new suppliers and changing customers.

D&O Liability

The conflict has signaled a shift in corporate reactions to events that trigger moral/ethical decisions. Over a thousand companies have announced they are leaving or voluntarily curtailing operations in Russia.

The exodus of Western companies from Russia illustrates how public pressure can amplify risks for company decisions intended to demonstrate their commitment to environmental, social, and governance (ESG) programs. For example, choosing to either continue doing business in a country perceived as acting contrary to ESG values, or to exit and trigger a financial loss, may complicate directors and officers (D&O) liability risks. Russia has also threated insolvency proceedings and criminal liability for companies seeking to close their Russian operations.

The Russia-Ukraine conflict has exacerbated post-COVID-19 economic risk, accelerated inflation and drawn a line under recent Western economic orthodoxy. While many Western companies have announced plans to divest assets in Russia, often at significant expense, how organizations handle future decisions to exit countries—and whether those decisions trigger derivative actions that may be covered under D&O liability insurance—remain unknown.

Reprinted with permission; Brink News

Week in Review Editorial Team:

Annacaroline Caruso, editor in chief

Jamilex Gotay, editorial associate

Kendall Payton, editorial associate