Following on from the devastating impact of the coronavirus pandemic, the global economy has continued to face ongoing challenges that have rippled through markets and economies across the world during 2022. These have included higher inflation and interest rates, in addition to increased commodity prices.
As a result, countries across the world are contending with slower growth rates at a time when many economies were emerging from a period of weaker growth due to the coronavirus pandemic. Many countries must now contend with the impacts of stagflation, which has the potential to persist well into the future.
Stagflation refers to periods where inflation rates are high or increasing, yet economic growth is slow and unemployment rates are high or increasing. This presents a difficult dilemma for economic policy makers as actions taken to reduce inflation can lead to unfavourable rises in unemployment and actions taken to reduce unemployment can worsen inflation.
According to the World Bank – Global Economic Prospects Report (2022), global growth was forecasted to slow sharply from 5.7 per cent in 2021 to 2.9 per cent in 2022, which represents a 2.8 per cent contraction. Global growth in 2023 is forecasted to edge up slightly to a subdued level of 3 per cent. In a bid to overcome downside risks, the World Bank outlines that policy makers across the globe will need to concentrate their efforts across five key areas.
Firstly, by limiting the harm to people affected by the war in Ukraine. Secondly, counter the spike in oil and food prices by increasing the supply of key food and energy supplies. The third area of action is the need to act on debt relief. The fourth area of focus relates to health preparedness and efforts to contain the coronavirus. In conclusion, the World Bank sees the fifth area of effort being the need to focus on the transition to low-carbon energy supply.
Advanced economies are forecasted to decline from 5.1 per cent in 2021 to 2.6 per cent in 2022. Growth for 2023 is expected to be in the area of 2.2 per cent. Growth for Emerging Markets and Developing Economies (EMDE’s) are projected to slow from 6.6 per cent in 2021 to 3.4 per cent in 2022 and is expected to improve to 4.3 per cent between 2023 and 2024.
Source: World Bank Economic Prospects, 2022
Global inflation
It is noted that up to June 2022, inflation across all segments of the global economy has accelerated, mainly due to post-coronavirus demands and ongoing supply constraints. This has been further exacerbated by labour market constraints, coupled with increasing commodity prices and the ongoing conflict in Ukraine. Within the World Bank – Global Economic Prospects Report (2022), global median headline CPI inflation rose to 7.8 per cent (y/y) in April 2022, which represented a level not seen since 2008.
Aggregate EMDE inflation increased to circa 9.4 per cent, a level also not seen since 2008, whilst inflation in advanced economies reached circa 6.9 per cent, a level not seen since 1982.
Purchasing Managers Index (PMI)
The global composite Purchasing Managers Index (PMI) for 2022 remained above the 50 point mark until July, when it dropped to 47.7 points, the first drop below 50 since post-coronavirus recovery witnessed in June 2020. Since then, it marginally recovered to 49.7 points in September on the back of increases in global goods trade volume before falling back to 49 points in October 2022. This was a result of weaknesses in global manufacturing activity and goods trade.
Q2 2022 levels represented a 28-month low, dating back to June 2020. This illustrates a contraction of activity with business confidence declining as a result of ongoing geopolitical tensions, growing stagflation and financial instability. Whilst a weakened demand for goods has eased supply chain issues, it is also noted that exports of services have been boosted with increased global tourism.
Source: IHS Markit, JP Morgan
Commodity Prices
There is evidence of a significant slowdown in global growth with widening concerns of a global recession, both of which are impacting commodity prices. Furthermore, several nations and economies are also experiencing considerable currency depreciation that is exacerbating their already fragile economic position. As the outlook for global growth weakens, it is expected that commodity prices will fall over the next 24 months, albeit still above a five-year average.
As reported by the World Bank – Commodity Market Outlook Report (October 2022), energy prices are expected to fall by 11 per cent in 2023 and 12 per cent in 2024. Agricultural and metal prices are projected to decline 5 and 15 per cent respectively in 2023, before stabilizing in 2024. However, in the same report the World Bank outlined a number of short and medium term risks, such as supply issues in Europe exacerbated by the ongoing Ukraine-Russia conflict, which could result in further increased energy prices. This in turn may lead to higher non-energy prices in other areas, such as food supply.
A recent Special Focus report issued by the World Bank outlines that widening concerns of a global recession have impacted copper prices since peaking in March 2022. Furthermore, it outlines that a change in demand for aluminum has led to lower aluminum prices, and that prices will likely remain volatile as the energy transition unfolds and the demand moves from fossil fuels to renewables, which will benefit some metal producers.
The below graph illustrates how commodity prices, and energy in particular, have increased since 2020. Whilst there have been reductions in metal prices since peaking in 2022, it is predicted that energy prices may only peak in 2023 before easing from 2024 onwards.
Source: IMF, World Economic Outlook Database, October 2022
Source: World Bank Economic Prospects, 2022
Energy
Over the course of 2022, energy prices continued to rise steadily, building on a trend that commenced during Q3 2021 and continued up to Q3 2022, with pronounced fluctuations in natural gas and coal from levels witnessed in 2020. Whilst prices for natural gas appeared to level during the first half of 2022 the markets witnessed a significant rise following Q2 2022, as several European countries looked to increase reserves. Despite global efforts towards a transition to cleaner forms of energy, the price of coal also increased during the same period as many countries sought to secure supply ahead of winter periods in the northern hemisphere. During the same period of time, it is evident from the below graph that whilst oil prices have increased since lows of 2020, they have not fluctuated at the same level when compared to gas and coal.
As reported by the World Bank – Commodity Market Outlook Report (October 2022), energy prices have declined from record highs earlier in 2022 amid slowing global growth and concerns about a possible global recession. Prices have been extremely volatile, with wide divergence between individual energy commodities. The main downside risk for energy markets is a global recession, which could cause a marked reduction in energy demand and sharply lower prices.
Source: IMF Primary Commodity Prices
Oil
Since peaking in June 2022 at circa USD 117/bbl OPEC Basket, oil prices have fallen by circa 19 per cent and was priced at USD 95/bbl during Q3 2022. Consistent with the overall trend witnessed across energy prices, oil prices during 2022 have been influenced by widening concerns of a global recession, further coronavirus restrictions in China and the release of oil reserves from major economies across the globe. As a result, there was a decline in global oil consumption during 2022, however, the impact was offset by many economies moving away from natural gas to oil due to a spike in natural gas prices over the course of 2022.
As reported by the World Bank – Commodity Market Outlook Report (October 2022), during Q3 2022, OPEC+ members agreed to cut production by two million barrels per day, however, any potential rebound may prove to be temporary as the actual reduction may be just over half of this headline number.
Additionally, the World Bank – Commodity Market Outlook Report (October 2022) outlines that downside risks primarily arise from threats to global consumption, stemming from a global recession and more prolonged coronavirus restrictions in China. The upside risks are dominated by supply issues, including the extent to which Russia’s exports are impacted by new trade measures, OPEC+ supply decisions, possible disappointment in production from the United States and lower levels of strategic oil reserves.
Source : OPEC
source: OPEC 2022 World Oil Outlook 2045
Natural Gas & Coal
As reported by the World Bank – Commodity Market Outlook Report (October 2022), natural gas prices have been exceptionally volatile, with some forecasts expected to reach all-time highs in Q3 2023 before sharply declining. As several European countries look to increase reserves of natural gas, prices reached an all-time high of USD 70/mmbtu in August 2022, whilst coal prices also reached an all-time high of USD 330/mt in July 2022. During 2022, the price fluctuations witnessed within the natural gas markets also influenced movements in the price of coal as several economies focused on securing energy supply from the coal market, as a result of increases in gas prices. These decisions were contrary to the understood priorities of several economies who had earlier sought to transition away from coal towards cleaner sources of energy.
Metals
There was high volatility within the metals market during 2021 and 2022. The World Bank outlines that the metals and minerals price index fell 20 per cent in Q3 2022 (q/q) and was 31 per cent lower in September than their March peak. As concerns of a global recession widen, the price outlook for metals has also fallen, with demand continuing to weaken following the post-pandemic highs of 2021. During this period, the demand for metals has also been suppressed due to the lockdowns in China, although it is expected to be boosted as restrictions are lifted moving forward.
According to the World Bank, metal prices are expected to fall by 15 per cent in 2023, following a marginal decline in 2022. Risks to the outlook are skewed to the downside and include a global recession as well as the potential of further lockdowns and deterioration in the real estate sector in China.
Upside price risks include the possibility of further declines of energy-intensive smelting activity if energy prices increase more than anticipated. Aluminum and zinc are especially vulnerable to fluctuations in energy prices as they are the most energy intensive metals to process. During Q3 2022, copper prices declined 19 per cent (q/q), with the market witnessing similar challenges during 2022 as that of other metals.
The graph below shows that prices are expected to fall circa 10 per cent in 2023, following an estimated decline of 5 per cent in 2022. It can be seen that iron ore prices are estimated to drop 23 per cent from 2021 levels.
Again, this can be attributed to the declines in global economic activity. It is thought that the market for iron ore is currently oversupplied and as a result further declines in price are expected in 2023.
A similar pattern has emerged after a review of aluminum prices during 2022, which is estimated to decline 18 per cent in 2023. Similar to the market for copper and iron ore, the demand for aluminum has also weakened during 2022.
Source: IMF, World Economic Outlook Database, October 2022
Global economic risks
Source: Economic Policy Uncertainty
Key economic risks 2023
The following are major risks identified for 2022 and beyond.
Throughout 2022, inflation has surged and economies across the globe have seen a slump in projected growth levels following improvements seen in late 2021. Many believe that inflation will remain at elevated levels for several years, resulting in lower growth projections, but with the prospect of a deep recession becoming a real issue for many economies.
The ongoing conflict between Russia and Ukraine continues to be a significant risk, threatening the stability of a region which has not witnessed such a level of political uncertainty since World War II. There also remains a risk to global stability, if the conflict were to escalate beyond the region.
With vaccine rollout differing significantly between countries, the threat of coronavirus and variant strains remains a risk to many countries. As northern hemisphere countries enter winter seasons there are deep concerns about the impact of further lockdowns, should new strains emerge, coupled with a sharp increase in other seasonal viruses.
Trade tension between the US and China continues to pose a risk and competition is expected to rise within the technology sector with restrictions placed on tech exports to and from China, leading to exposed supply chains.
As a result of the ongoing conflict between Russia and Ukraine, many countries across the region are facing threats to energy supplies serving domestic power and heating markets. It is feared that several countries may face rolling blackouts should the region witness a prolonged winter of low temperatures and higher energy demands.
New technologies are set to reshape economies with a drive towards autonomous vehicles and the use of drones; the digital world will be vulnerable to cyberattacks, as already seen with critical infrastructure (energy, healthcare and transportation) and geopolitical and economic uncertainties due to a lack of governance.
Extreme weather caused by climate change will urge governments to make commitments in reducing their countries emissions. Focus will be placed on oil, gas firms, airlines, car manufacturers and the food industry as this will remain a prevailing risk in 2023 and beyond.
Biodiversity loss is caused by climate change, pollution, deforestation and habitat loss. This risk threatens global ecosystems, affects livelihoods, food supplies and income and may lead to disease outbreaks.
Natural disasters can be a preventable risk, and solutions such as reforestation, education, technology governance and economic support could help mitigate and reduce the risks caused by global warming, pollution and mining.