2022: Dismantling of the Global Economy

One of the most eventful years in recent memory is finally drawing to a close. The year was grappled with multiple crises. Arguably the most impactful event of the year was Russia’s invasion of Ukraine which started as a “special military operation” in February 2022, and continues to date with no end in sight. NATO allies responded to the Russian aggression and in support of Ukraine with a series of severe economic sanctions that targeted wealthy oligarchs as well as Russian oil and gas supplies. With Russia being the world’s 2nd largest oil exporter, largest gas exporter, and largest wheat exporter, a full-scale energy and food crisis was imminent. Europe was glaring at a daunting gas shortage, being the largest market for Russian gas. The war sent energy, food and other commodity prices soaring all over the world leading to most countries, particularly the West, facing multi-decade high inflation levels. Central banks raised interest rates from almost zero to levels not seen in years, to grapple with the escalating price trajectories. ?Resultantly, with high-interest rates and global supply chains affected, the global economy is on the brink of a severe recession. Higher rates in the US and the global slowdown strengthened the value of the dollar as well, with the dollar index reaching a high of 113 compared to 96 at the start of the year. The brunt of the economic meltdown is being faced by the developing economies that are faced with crippling inflation levels due to supply shocks and the energy crisis, constrained fiscal space and a debt crisis as their major debt is dollar-denominated.

The zero COVID policy in China throughout most of 2022 also contributed to the economic slowdown. Numerous large corporations have their manufacturing hubs in China which meant that because of the zero-COVID policy the global supply chain issues were only exacerbated. Moreover, China being the 2nd largest economy in the world and the world’s largest exporter, the slowdown in the Chinese economy due to lockdowns and border controls meant that there was a large spillover effect on the global economy as well. Major country-wide protests began in the country against the zero-COVID policy and finally earlier this month the government started loosening up the policy, which led to a surge in oil prices (almost 10% up since 7th December).

2022 once again highlighted the domination of the West in the post-World War order. The war in Ukraine saw a coordinated and unified response from the West both in economic terms as well as military support while the gulf between China and the US has only widened. President Biden’s recent meetings with African leaders is only another step further in establishing the fact that the US will counter China in every region. China is a heavy investor as well as creditor for African nations. Moreover President Biden’s visit to Saudi Arabia this year to meet the Crown Prince, that was characterised by the infamous fist bump, did not yield the desired results. The OPEC production cut 3 months later was dangerous timing for Biden with his mid term elections due in November. Biden was a staunch critic of MBS and publicly held him accountable for the murder of journalist Jamal Khashoggi but the global energy crisis in the wake of the war and the mid-term elections forced him to take desperate measures in desperate times.

Similar global themes are likely to continue into 2023. Russia is only preparing to up the ante on the Ukraine war. All large economies will continue to fight jarring inflation levels and energy crises while interest rates are expected to inch up further. Supply chain disruptions may keep inflation elevated however crumbling aggregate demand will and has started to provide some respite to commodity prices. Demand will continue to contract and it global economies are bracing for the impending recessionary impact.?