On review, the coronavirus pandemic’s impact on the global economy caused a GDP decline on an annual basis greater than two times the decline caused by the global financial crisis of 2008.
2009 = -1.3 per cent, 2020 = -3.4 per cent, according to World Bank Group.
The subsequent rebound during 2020-2021, in particular for goods traded, has been rapid and much faster than that experienced in 2009 and the following years. Although the global growth outlook remains positive, led by strong recoveries in advanced economies and China, re-surging coronavirus infections, new variants, mismatched vaccination programs and unequal vaccine distribution in developing countries, continues to impede the overall recovery of the global economy.
The global GDP was forecasted to grow by 5.6 per cent in 2021 following a 3.5 per cent contraction in 2020. The GDP in 2022 is forecasted a growth of 4.3 per cent. The World Bank Group - Global Economic Prospects Report (2021) outlines that although forecasts are encouraging, they are expected to be highly uneven across different countries, especially developing economies. The World Bank Group caveat the substantial uncertainty of global markets in these unprecedented times and in their report they explore three scenarios for recovery and consider the associated impacts to the global economy.
Baseline scenario: Forecasted Recovery - Advanced economies achieve effective containment of coronavirus via widespread vaccination by the end of the year. Key developing economies significantly reduce local transmission rates.
Upside scenario: Sustained Expansion - Accelerated technological adoption, rising investment and labour force participation strengthens output. The policy makers of developing economies implement growth-enhancing reforms and diversify from economies reliant on commodities or tourism
Downside scenario: A Faltering Recovery - Policy support is withdrawn, pent-up demand is exhausted, new pandemic variants are experienced, sustained inflation pressures by disparate supply and demand, increased debt servicing costs for governments limiting investment.
The above scenarios indicate the challenges for global recovery post-pandemic and in meeting current forecasts following the decline in 2020
Advanced economies are forecasted to see growth of 5.4 per cent in 2021 and 4.0 per cent in 2022 respectively, following the 4.7 per cent contraction in 2020. As for Emerging Markets and Developing Economies (EMDEs) they are forecasted to see growth of 6.0 per cent in 2021 and 4.7 per cent in 2022, following the 1.7 reduction in 2020.
Source: World Bank Economic Prospects, June 2021
Purchasing Managers Index (PMI)
In April 2020, the global composite Purchasing Managers Index (PMI) sunk to a record low of 26.5 following the onset of the coronavirus pandemic - it quickly rebounded to above 50 points in July 2020
Since this period the PMI has remained above 52 (indicating month on month growth) and was recorded at 54.5 at the beginning of Q4 2021. The sentiment for business activity was set to remain positive until at least the end of 2021, however there were signs that confidence slightly reduced following continuing supply disruptions and persistent inflationary forces.
The inflationary pressures of elevated energy costs, increased freight costs, supply-chain delays, raw material shortages, increased staff costs, pent-up demand from precautionary savings and reduced opportunities to spend over the course of the pandemic, all lead to significant potential risks.
Source: IHS Markit/JP Morgan
Commodity Prices
Many commodity prices rose sharply in 2021, including a significant number well above pre-pandemic levels. Q3 2021 saw key non-energy indexes of agriculture, fertilizers and precious metals at around 30 to 50 per cent higher than pre- pandemic levels, whilst metals and minerals were around 50 per cent greater.
Aside from the evident supply disruptions and uneven recovery faced post-pandemic; adverse weather also impacted many commodity markets. Most notably, conditions such as high summer temperatures, droughts and floods caused a ripple effect in overall commodity prices. High temperatures cause a greater demand for electricity, droughts impact agriculture and hydro-electricity supply whilst floods in certain areas disrupt the supply of coal and certain metals.
All of these factors have contributed to increased input prices for manufacturing and agricultural goods. They are also set to cause considerable inflationary pressures on markets, particularly for EMDEs who are facing high international food prices and energy costs
With regards to high food prices, the Food and Agriculture Organization (FAO) and the World Food Program (WFP) underline the challenges faced worldwide by food security risks—in 2020 more than 155 million people are already suffering famine or famine-like conditions and a further 41 million are at risk of falling into this category.
Source: IMF, World Economic Outlook Database, October 2021
Source: World Bank Economic Prospects, June 2021
Energy
Energy prices surged in Q3 2021, particularly natural gas and coal reaching record highs. Looking at percentage increases against the same period compared to the previous year, the Q3 2021 natural gas prices have increased a staggering 324 per cent, with coal at 190 per cent and oil at 70.9 per cent respectively.
Overall, the volatility in the market this year has given further gravitas to how fluctuating weather patterns, attributable to climate change, are becoming a significant supply/demand risk to energy markets.
From a decarbonization perspective and transitioning to renewable energy sources, this period has caused many countries to rethink strategies considering the reliability of renewable energy and to reconsider backup energy supplies. A positive aspect of increased fossil fuel prices this year is that it has made the prospects of solar and wind power generation a much more palatable alternative, and if implementation is fast- tracked by countries it will reduce their dependency on volatile fossil fuel.
According to The World Bank’s Commodities Markets Outlook October 2021, overall energy prices soared more than 80 per cent in 2021. Growth forecasts are somewhat subdued at two per cent for 2022, and in anticipation of continued robust demand and gradual production gains, before sharply falling in 2023 as supply considerably opens up.
Source: IMF Primary Commodity Prices
Oil
During the month of October 2021, the OPEC basket price reached $82 per barrel, rising above pre-pandemic levels and reaching a seven-year high.
With the OPEC+ ministers reaching an agreement in July 2021 to boost oil supply by a further two million barrels per day from August to December 2021, oil price increases were expected to cool off in Q4. Oil price increases during the year were buffeted by production disruptions in the US, alongside increased electricity demand for cooling and heating considering adverse weather conditions.
According to The World Bank, oil prices are forecasted to average $74/bbl in 2022, up from a projected $70/bbl in 2021, before dropping to $65/bbl in 2023. Oil demand is expected to continue its recovery and reach its pre-pandemic level by the second half of 2022.
Upside risks to oil prices suggest that an increased substitution of crude oil over coal and natural gas for heating and electricity production means projections could be modest at this stage. Further outbreaks of coronavirus continue to be the predominant downside risk to oil demand as pandemic-imposed restrictions reduce consumption.
Source : OPEC
source: OPEC, (2021) World Oil Outlook 2045
Natural Gas & Coal
Key factors that are attributable to the surge of natural gas prices of 69 per cent and coal 44 per cent in Q3 2021, are seen in the economic recovery of China and its demand for fossil fuels for electricity generation. In addition, remarkably hot weather periods which increased electricity demand for cooling and reduced renewable energy production is seen in several countries due to low wind speeds and droughts.
Metals
The high volatility of metal prices during 2021 can be attributed to production shortages and supply disruptions. The pent-up increased a demand for machinery, manufacturing and construction following the easing of the pandemic restrictions.
Iron ore, in particular, has been on an upward trajectory since late 2018, due to the supply side reforms implemented in China to decrease surplus steel capacity and increase demand and prices. Adding to that, other major iron ore producing countries, such as Brazil, have been unable to meet stated targets due to the pandemic, extreme weather, unexpected maintenance and mining accidents, and Australia’s miners have been unable to offset the deficit caused by lower volumes from Brazil.
These factors have all attributed to the IMF forecasted metal price increase of 48 per cent in 2021. Key risks associated with the metal price outlook are the energy-related supply disruptions, China’s demand requirements and the global challenge of decarbonization from extraction to the final product. China acquires 50 per cent of the metals produced across the globe - they are the largest buyer of copper and remain the world’s largest producer and consumer of steel.
The outlook for metal prices in 2022 is that they are forecasted to fall by five per cent as the global recovery improves and peaks in metal prices stabilize following averaged price increases over 2021 in iron ore by 58 per cent, copper by 48 per cent and aluminium by 41 per cent in comparison to the previous year.
Source: IMF, World Economic Outlook Database, October 2021
Decarbonization
Commodity prices globally are facing increasing price pressures to meet decarbonization targets. This was recently bolstered during the COP26 2021 summit and is in keeping with the Paris Agreement 2015.
In September, 2020 China also announced its commitment to becoming carbon-neutral by 2060 and it is becoming increasingly evident that every party in the supply chain is paying closer attention to decarbonization.
Further encouraging signs in meeting these targets can be seen through the financial sector in socially responsible investors. It is rightfully becoming best practice for companies to focus on Environment, Social and Governance (ESG) criteria and investors are utilizing this as part of their considerations as to whether companies are worth investing in. Increasingly, businesses are being obliged to conscientiously review their O&M, machinery and power sources and then innovate to create technological breakthroughs to deliver these targets.
Global Economic Risks
The following are major risks identified for 2022 and beyond.
During 2020, the pandemic caused a political and economic impact worldwide and is a continual risk moving into 2022. The pandemic heightened vulnerability for emerging markets and may continue to impact commodity markets and oil price. Latin-America was one of the least prepared regions to deal with the virus and they struggled to contain the outbreak across the region. The economies were already unsettled due to slow economic growth, low-quality public services and vulnerable middle classes expecting increased state spending on social services.
Tensions between India-China and the South China Sea remain a risk across military, diplomatic and technology fronts.
Brexit remains an ongoing risk for the UK economy following the transition period from the beginning of January 2021 and will remain so during 2022. Results from the negotiations will outline and detail how business procedures will operate.
Trade tension between the US and China will remain a risk even with a new President. Competition is expected to rise within the technology sector with restrictions placed on tech exports to and from China and exposed supply chains..
As new technologies are set to reshape economies with a drive towards autonomous vehicles and the use of drones, artificial intelligence alone is expected to boost global growth by 14 per cent by 2030. 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. An emphasis will be placed on oil, gas firms, airlines, car manufacturers and the food industry as this will remain a prevailing risk in 2021 and beyond.
Biodiversity loss is caused by climate change, pollution, deforestation and habitat loss. This risk threatens global ecosystems, affects livelihoods, food supplies, income and disease.
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 from global warming, pollution and mining.