Four challenges for the global economy in 2022
Over the last two years, the pandemic has played a major role in shaping the global economy. Many sectors have found themselves in difficulty and are still struggling, and the countries dependent on those sectors are now quietly trying to get back up again. Despite the strong economic recovery in 2021, the financial difficulties are not over and may still cause economic slowdown. In addition, many countries are faced with an increasing debt burden, high inflation and, burning issue of the moment, geopolitical tensions, which all play a major role. A summary is given below.
1. Economic slowdown
To limit economic damage, many countries introduced support measures; once again, to rebuild their economies, many are having to take the necessary measures. Partly as a result of that, the global economy is experiencing a strong rebound, but it remains to be seen how long it will last. A new wave of Covid-19 could quickly destabilise this shaky recovery.
We see this happening, for example, in China, which is currently experiencing a slowdown in growth. In recent months, the country has been hit by several virus outbreaks, following which the government decided to re-impose stringent, far-reaching restrictions. Moreover, the crisis in the key real estate sector is also damaging economic activity, with all the resultant consequences. At a global level, this slowdown will impact China’s commercial partners and have an effect on the price of raw materials.
2. Increasing debt burden
A second consequence of the pandemic and the recovery plans put in place is a huge increase in national debt. This poses a particular problem for emerging countries where the economic impact of the pandemic has been somewhat mitigated thanks to the temporary suspension of debt servicing for the poorest of them. The consequences of taking this measure away are still a matter of conjecture.
Governments are not the only ones left with huge debts; companies in the private sector are in the same situation, and here we are thinking primarily of companies in the service sector, for example in tourism, culture and aviation. Furthermore, the disruption of global supply chains, rising raw material prices and high goods transportation costs are also causing concern among companies.
A third challenge facing the global economy is inflation, due in part to ongoing supply problems and rising demand as a result of the economy’s resurgence in a post-Covid era. And product scarcity goes hand in hand with higher prices. In response to inflationary pressure, the American Federal Reserve intends to tighten its monetary policy. It previously announced it would likely raise interest rates in March, which would be the first time since December 2018. As a result, vulnerable countries are at risk of finding it more difficult to access the capital market. It is not excluded that the European Central Bank would also hike up interest rates.
On top of that, many businesses are finding it difficult to increase their prices, meaning that their profit margins are decreasing significantly. Higher living costs are also leading to social unrest.
4. Geopolitical tensions
The last and probably biggest risk is caused by geopolitical tensions. The first thing that comes to mind is the Russia-Ukraine war, where the fighting but also the sanctions imposed are greatly affecting the region as well as Europe and the global economy. You can find the most recent updates on this page.
Further afield, in Asia, next to the military tensions around Taiwan, there are the ongoing trade tensions between China and the USA over semiconductors. To short-circuit Chinese technological development, the USA has imposed sanctions on the sector, in some cases at the expense of its own industry.
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