May 30, 2022

What We're Reading:

World Bank boss warns over global recession. David Malpass told a U.S. business event on Wednesday that it is difficult to “see how we avoid a recession.” He also said that a series of coronavirus lockdowns in China is adding to concerns about a slowdown. (BBC)

Worry about stagflation, a flashback to ‘70s, begins to grow. Stagflation is the bitterest of economic pills: High inflation mixes with a weak job market to cause a toxic brew that punishes consumers and befuddles economists. (AP)

Here’s how much it could cost to rebuild Ukraine—and who would pay for it. Russia’s invasion of Ukraine has already destroyed billions of dollars’ worth of infrastructure, blocked exports from key Black Sea ports, and displaced more than 12 million people. (NPR)

Turkey demands ‘concrete steps’ to allow Finland, Sweden NATO membership. A senior Turkish official insisted after talks with Swedish and Finnish officials Wednesday that Turkey would not agree to the two Nordic countries joining NATO unless specific steps are taken to address Ankara’s objections. (PBS)

People in US and UK face huge financial hit if fossil fuels lose value, study shows. Individuals in rich countries face huge financial losses if climate action slashes the value of fossil fuel assets, a study shows, despite many oil and gas fields being in other countries. (The Guardian)

China pledges greater credit support to stabilize economy. Chinese authorities have pledged to increase credit issuance and enhance financial support for key businesses and fields. (HSN)

Russia says it will pay foreign debt in rubles after ban from US banks. Russia says it will pay dollar-denominated foreign debt in rubles, a move that is likely to be seen by foreign investors as a default. (PBS)

How can Ukraine export its harvest to the world? Ukrainian farmers have 20 million tons of grain they cannot get to international markets, and a new harvest is about to begin. What can be done to get the food to people who desperately need it, as prices soar around the world? (BBC)

Explainer: What’s at stake for China on South Pacific visit? China’s Foreign Minister Wang Yi is visiting the South Pacific with a 20-person delegation this week in a display of Beijing’s growing military and diplomatic presence in the region. (DW)

Germany’s dirty Colombian coal. Berlin wants to reduce its reliance on Russian coal by importing more from the biggest open-cast coal mine in Latin America. Its poor environmental and human rights standards have earned it the nickname “The Monster.” (HSN)

Oil jumps to 2-month high on tight supplies, EU seeks Russian crude ban. Oil prices climbed about 3% to a two-month high on Thursday on signs of tight supply ahead of U.S. summer driving season, as the European Union wrangled with Hungary over plans to ban crude imports from Russia over its invasion of Ukraine. (Reuters)

Rare ship-to-ship transfers keep oil moving from Russia to China. A logistically risky and costly transfer of crude between tankers at sea highlights the steps at least one Chinese buyer is willing to take to ensure the smooth flow of oil from eastern Russia to Asia. (Bloomberg)

Blinken warns China threat greater than Russia long term. Whilst Russia represents an immediate threat, the long-term one China poses to the global order is more serious, U.S. Secretary of State Antony Blinken has said. (DW)

Is the ‘remote work window’ about to close? More people are applying for remote jobs amid concern that office recalls could reduce home-working opportunities. Are they right to rush? (BBC)

China continues to maintain lockdowns, mass testing and border restrictions in an effort to curtail the virus. Tactics that are drawing more concern and taking their toll on its citizens and the companies that do business with the country, according to various different report.

In particular, the effectiveness and wisdom of these measures are being questioned. “Despite such protocols, the government was unable to prevent hundreds of thousands of new cases from emerging in [Shanghai] during the lockdown, while causing much unnecessary hardship and suffering,” Foreign Affairs reported. 

“The government's response to the outbreaks … is nothing short of draconian,” said Leland Miller, CEO, of China Beige Book, in an interview with BNN Bloomberg on May 2. “You have a handful of COVID cases … which means that the response isn't reflective of the outbreak itself. It's reflective of the fact that they want to have absolutely nothing going on anytime they see COVID in the area. So, it's rather an extreme measure.”

But has China has put itself in a corner? “If it doubles down, it will further hamper the country’s economic recovery, imposing costs that the people no longer believe to be worthwhile,” according to an opinion piece in The Globe and Mail. “But if it eases COVID-19 restrictions, infections and deaths will likely increase rapidly as the virus spreads through a population that lacks the level of immunity found in most other comparable countries.”

In the BNN Bloomberg interview, Miller said thinks Beijing’s mistake was declaring victory early on during the pandemic. “They declared zero Covid [as] this great victory by the Party. Now they’re in a position where they're in a very politically sensitive year [with the National Congress of Chinese Communist Party] in the fall, and you can't have a public health crisis. You particularly can’t have a public health crisis in the capital city or one of the most important cities on the coast. So, they're sort of stuck in a position where they can't really pull it back but they probably can't exceed the current situation.”

These policies “have triggered an economic slowdown that is in some ways worse than the one in early 2020 during the initial outbreak of Covid-19 in Wuhan, the country’s No. 2 leader [Li Keqiang] said on Wednesday as concerns grew over the impact of lockdowns,” reported The New York Times.

During first-quarter 2022, China’s gross domestic product missed its official target of 5.5%, coming in at 4.8%, according to the National Bureau of Statistics of China. And the second-quarter is not expected to perform any better. “Since many of the harshest Covid containment measures have been imposed in the second quarter, analysts have expressed skepticism that the country can hit its growth targets,” The New York Times said.

“The data are starting to reflect the fact that big cities are locked down; people can't do commerce; transportation between cities is shut down; [and] people can't get to their job,” Miller said. “If it continues through May, you're going to have zero or worse growth for Q2.”

China’s “nosediving housing market and Xi Jinping’s uncompromising zero-covid policy is just one recent conundrum that has led foreign fund managers to question whether China is losing its pragmatic approach to managing the economy,” The Economist noted.

“U.S. Treasury Secretary Janet Yellen said last week that China’s COVID lockdowns appear to be impeding the flow of goods and hampering the global supply chain,” VOA said. “She warned the slowdown in the Chinese economy could affect other countries.”

In April, Shanghai recorded zero car sales because nearly all dealers were closed, according to the Shanghai Automobile Sales Trade Association. Overall, China’s cars sales plummeted 31.6% year on year.

“Several major Taiwanese computer manufacturers with factories in Shanghai, including Quanta Computer, Compal Electronics, Wistron, Inventec and Pegatron, reported double-digit declines in April’s revenue year-on-year due to factory line suspension during the lockdowns,” VOA reported.

Last week, the Wall Street Journal stated that Apple Inc. plans to boost production in India and Vietnam to reduce its dependence on China. “Apple has been reliant on Chinese manufacturing for over a decade, with analysts estimating that 90% of the company’s products are made by contract manufacturers in China,” Euronews said. “This reliance has led Apple’s success to become vulnerable to changes in COVID-19 policies enacted by the Chinese Communist Party.”

China’s lockdowns also have led to the loss of foreign investors. According to the European Union Chamber of Commerce in China, a recent survey shows that 23% of respondents are considering shifting current or planned investments to other markets—more than double the number at the start of the year, and the highest proportion in a decade.

So, what should does China do now? “Unless China is prepared to shut down its economy with every new variant, it needs to vaccinate the elderly and prepare its people for more COVID-19 deaths,” The Globe and Mail opinion piece states. The Foreign Affairs article shares a similar sentiment: “For all countries, COVID-19 of course remains a public health problem. But for China, the chief risks of the virus have become less epidemiological than political and economic. … If Beijing loses the trust and support of the public on this core issue—at a time when the Chinese economy itself is suffering from continual lockdown shocks—a regime once known for its technocratic efficiency could soon face a growing legitimacy crisis.

Supply chain disruptions have been making headlines for the last two years, and rightfully so. No country, industry or business is untouched by the effects of supply backlogs. And as the world attempts to create a solution, it has become obvious that there is no simple fix.

“It's become clear for B2B businesses everywhere that waiting for uncertainty to pass is no longer a valid strategy,” reads a recent Forbes article. “You’re likely in the midst of mitigating the risks of global supply chain challenges by changing processes, prioritizing product lines, building stock or sourcing new vendors.”

The Global Supply Chain Pressure Index worsened last month, according to the New York Fed’s Liberty Street Economics unit. “The worsening of global supply chain pressures in April was predominantly driven by the Chinese ‘delivery times’ component, the increase in airfreight costs from the United States to Asia, and the euro area ‘delivery times’ component, as other components have eased over the month,” the report reads.

Some experts say the global supply chain has changed for good, and the challenges will remain for decades. According to Freightwaves, some of the biggest challenges include:

• Increased geopolitical risk, and lack of peace and stability, which supply chains need to work properly
• A smoothly running supply chain requires “buffer stock,” which is challenging with declining population demographics
• There is a conflict between environmental, social and governance (ESG) goals and supply chains optimized for cost and speed. If we prioritize ESG, we will need to contend with supply chain risks.

The Russia-Ukraine conflict has once again highlighted just how fragile the global supply chain really is, and how difficult it is for countries to find alternatives. For example, “Europe is winding down its energy dependence on Russia, but it’s a long process and it could take up to the end of the year to become more independent,” said Fred Dons, director and head of CTF Flow at Deutsche Bank (Amsterdam, Netherlands), during FCIB’s Global Expert Briefing. “And without business from Europe, Russia will shift that business to Asia, which creates its own issues.”

That is because it is extremely difficult logistically for Europe to import the same amount of oil it was getting from Russia elsewhere, and Russia cannot easily export oil all the way to Asia, Dons explained. “You will need to use smaller carriers that can make the full journey,” he said. “And the travel time for shipping oil will go from two weeks to two months. But that is what is happening so you can expect energy prices to remain high for at least the rest of the year.”

Food is another victim of supply disruptions—made worse by the war in Ukraine. According to several news reports, Russia is blocking several Ukrainian ports from shipping fertilizer and wheat. “I can tell you on a scale of one to 10, I’m probably at the 10 level of alarm because this crisis has exacerbated what is already a serious food insecurity issue,” U.S. Ambassador to the United Nations Linda Thomas-Greenfield told the BBC. “They are attacking Ukrainian silos and keeping farmers from planting. So, the action is in Russia’s hands to stop this food blockade [and] to also start to export their own food that they have put restrictions on.”

The war in Ukraine and new lockdowns in China have significantly deteriorated the balance of risks for companies. While cash buffers will prevent insolvencies surging quickly in the short term, trade credit insurer, Allianz Trade, expects global insolvencies to rebound by 10% in 2022 and 14% in 2023, approaching their pre-pandemic level.

Companies now face multiple global headwinds once again, from extended supply-chain disruptions and transportation bottlenecks to high input costs and shortages, notably for energy and commodities but also labor. To add to this, they also face higher funding costs as the global surge in inflation accelerates monetary tightening.

Yet, Allianz Trade identifies three key signs of resilience:

• The total cash holdings of listed firms was 30% higher at the start of 2022 than in 2019 at the global level. 
• Allianz Trade’s proprietary data show that the number of fragile firms (i.e., those likely to default in the next four years, based on profitability, capitalization and interest coverage as of 2021) remained contained in Europe, particularly in Italy (to 7% in 2021 from 11% in 2020) and France (to 12% from 15%).
• Finally, the Q1 2022 earnings season has confirmed that listed companies have been far more capable of passing on higher costs to prices.

“These factors suggest that the global economy should be able to avoid a big surge in insolvencies—at least in the short term,” explained Clarisse Kopff, CEO of Allianz Trade. “Nonetheless, companies will have to be vigilant: The normalization of global insolvencies has already started. For some countries, catching up with 2019 figures will take a few years, but we are back to a high level of non-payment risk, both globally and locally.”

Allianz Trade identifies some pockets of fragility that may result in a strong rise in insolvency levels in 2022 and 2023. First, in 2021, working capital requirements increased particularly in Asia (2 days), Central and Eastern Europe (2 days) and Latin America (2 days), and for sectors such as household equipment (8 days), electronics (3 days) and machinery equipment (2 days).

In addition, the Eurozone posted a noticeable deterioration of its NFC debt-to-GDP ratio (5.2pp compared to 3.5pp for the U.S.).

Last but not least, the current international context has sparked a decline in real purchasing power for consumers, which could create another downside risk for companies in the form of slowing demand. In response, governments in France, Germany and Italy have already extended existing partial unemployment programs and introduced new forms of state-guaranteed loans, with more measures likely the longer the current crisis lasts.

“For the first time since 2019, we expect global insolvencies to bounce back in 2022 and 2023, approaching their pre-pandemic levels,” said Maxime Lemerle, head of insolvency research at Allianz Trade. “In France and Germany, insolvencies will rise in 2022 and 2023 (15% and 33%, 4% and 10%, respectively), but the number of cases will remain artificially low due to strong state support measures, which could delay the normalization of business insolvencies once again.”

In the U.S. (8% in 2022 and 23% in 2023), companies should benefit from the buffers accumulated since the pandemic, helped by the Paycheck Protection Program being massively transformed into subsidies and the recovery in profits. China also should be able to maintain insolvencies in check (1% in 2022, 11% in 2023), thanks to a low starting point and despite a rebound of difficulties for companies most exposed to international trade. In these countries, the number of insolvencies will not return to pre-pandemic levels in 2022 nor 2023.

“At this stage, we expect one out of three countries to return to their pre-pandemic levels of insolvencies in 2022, and one out of two countries in 2023,” added Ana Boata, head of economic research at Allianz Trade. “Western Europe in particular will see a diverging trend: In the United Kingdom and Spain, the number of insolvencies will overtake 2019 levels by the end of this year, while in Italy, Portugal and the Nordics, the normalization will happen only in 2023.”

Week in Review Editorial Team:

Diana Mota, Editor in Chief

Annacaroline Caruso, Editorial Associate