These four concerns will determine how the world economy develops over the next few years. Will there be less conflict and a stronger economy, or will there still be more unrest?
Chinese President Xi Jinping may have given one of the most significant speeches of the decade recently at the Communist Party Congress. He reassured the crowd—and the world—that his anti-growth zero-Covid policy is in place and that Beijing is more determined than ever to reunite Taiwan with China, peacefully if possible and forcibly if necessary.
As evidenced by Xi’s statements, severe geopolitical divisions and extreme economic uncertainty are the norm at the moment. Without a doubt, the pre-Covid era is not coming back. Instead, a tangle of underlying forces has upended the existing order and ushered in a time of extreme disorder.
I want to moreover look at four of these forces in order to develop some political-economic scenarios for the next two to approx five years: the deterioration in US-China relations, the Russian war in Ukraine, populism, and inflation. Any list of globally disruptive forces is inevitably condensed.
I won’t go into detail about topics like AI, other disruptive technologies, or the role of rogue nations like Iran and North Korea. The two biggest problems facing humanity today are probably climate change and biodiversity loss. I also won’t discuss the potential comeback of Covid.
Instead, given the likelihood of their interactions, I’m focusing on the areas that, in my opinion, will have the biggest impact on global trade over the next few years.
The 4 major issues which will hit the economy are-
1. Ukraine’s invasion by Russia
Despite the mobilization of reserve forces and nuclear sabre-rattling, Russia now seems increasingly likely to lose the war in addition to taking Kyiv slowly rather than swiftly as many western observers and the Kremlin had anticipated.
Three reasons account for this. First, the extraordinary bravery and composure of the Ukrainian people, military, and leaders. Second, complete chaos on the Russian side. Thirdly, there is the extraordinary cooperation of the west, which has provided the Ukrainian military with state-of-the-art tools, intelligence, and training while gradually destroying the Russian economy through boycotts and sanctions. The West made significant contributions as hundreds of companies left Russia, leaving behind assets and lost profits.
The West’s unity will be put to the greatest test this winter as the economy is predicted to enter a recession, if gas supplies in Europe run out and energy prices soar. Individual European governments may well change their minds about Ukraine if confronted with irate and cold voters.
Of course, Europe’s reliance on Russian gas is a self-inflicted injury. In 2014, only 20% of the gas that the European Union consumed was produced in Russia. At the start of 2022, it had reached almost 40%. Despite repeated warnings from Washington, Germany, the continent’s largest economy, increased its reliance after Putin’s illegitimate annexation of Crimea.
Russian gas, in Berlin’s opinion, is more reasonably priced and environmentally friendly than other options. Increased reliance was also consistent with the German doctrine of wandel durch handel, or “change through trade,” which dates back 50 years and guides German foreign policy toward the Soviet Union and Russia. Up until recently, US policy toward China was based on a similar philosophy, creating dependencies that were not drastically different, despite looking dangerously naive in retrospect.
3. U.S.-China relations
The US worked to deepen its economic ties with Beijing for four decades after then-US President Richard Nixon’s most historic visit to China in 1972. Things began to suddenly change during Barack Obama’s second term before exploding with Donald Trump’s trade war in response to Xi Jinping’s assertive posture at home and abroad.
In fact, the transition from cooperation to confrontation has been accelerated by the Biden administration’s strengthened security alliances in the region with more countries like Australia, export restrictions on cutting-edge technologies like microprocessors, and de facto defense commitments to the country Taiwan.
The day after Xi’s speech at the party congress, US Secretary of State Antony Blinken told a crowd at Stanford University that Beijing was now “determined to mostly pursue reunification on a much much faster timeline” than it had previously been.
Over the last few months, I have been spoken with hundreds of senior executives, primarily from Europe, about the current geopolitical landscape. Many people mentioned how challenging it was to leave Russia. However, less than 5% of the majority’s business is conducted in Russia. When asked that what they would do if the situation in Taiwan got worse, there was a deafening silence. Leaders in industries with exposure to the American and Chinese markets, such as the automotive, consumer, and luxury goods industries, readily acknowledge their lack of a strategy.
3. Populism
China is one reason why US policy toward Beijing is unlikely to change as it is one of the few topics on which the bitterly divided US electorate can agree. In 2011, 51% of Americans had a negative opinion of China, compared to 36% in 2011. Only Sweden, Japan, and Australia had more negative opinions in 2022, at an astounding 82%.
Western democratic voters are becoming less supportive of globalization. In 2017, a majority of people in 28 leading economies told the research firm Edelman that because of growing economic inequality, “globalization is taking us in the wrong direction.” Alarmingly, according to research by Edelman, only 18% of respondents in developed economies in 2019 agreed that “the system is working for me,” with 34% expressing uncertainty and 48% outright saying the system is failing them.
Parallel to this drop in democratic support, particularly among young people, Yascha Mounk and Roberto Stefan Foa, political scientists at John Hopkins University and Cambridge University, found that only 28% of millennials agreed that it is “essential to live in a democracy,” compared to 75% of Americans born in the 1930s.
Similar trends can be seen in many other countries. Populists have benefited from this and gained power, including Viktor Orban of Hungary, Jair Bolsonaro of Brazil, Donald Trump, and most recently Giorgia Meloni, the most right-wing leader in Italy since Mussolini. Italy came in second place globally for citizens’ dissatisfaction with democracy in a survey done in 2021, just behind Greece.
4. Inflation
There was a great deal of discontent with the current political-economic system before inflation reached levels not seen in forty years. The US Federal Reserve and the European Central Bank are aware that by responding by increasing the benchmark interest rates, they could trigger a recession. On both sides of the Atlantic, most analysts now predict one in 2023.
China’s zero-Covid policy continues to harm the second-largest economy in the world, and the country’s collapsing real estate market threatens the stability of the global financial system. The chief economist of the IMF, Pierre Olivier Gourinchas, was candid in his assessment of the state of the world economy at the IMF’s annual meeting in early October, saying that the “darkest hours” are still to come and that the outlook is “very painful.”
A bigger issue is stagflation, or interest rate increases that kill growth, raise unemployment, and fail to meaningfully reduce inflation. Anti-establishment populism combined with such economic dynamics would undoubtedly result in significant instability of the world order.
Four instances
I’ve been advising executives from various industries to consider four scenarios based on the aforementioned forces. The purpose of scenarios is not to predict the future. They are focused on making future plans while dealing with uncertainty.
Economic and geopolitical factors are the two categories I use to group the options. The best case scenario for the economy is one in which major market downturns are short-lived, inflation is swiftly reined in by central banks and policymakers, and a global economic recovery begins in the second half of 2023 before accelerating in 2024. A protracted stagflationary period, however, could result from hasty interest rate increases that expose and exacerbate structural flaws in the global economy.
Geopolitically speaking, Xi, who has been elected for a third term, might be more diplomatic with Taiwan while Vladimir Putin finds a way to withdraw from Ukraine while maintaining his face. Or, to put it more pessimistically, events in Ukraine may worsen significantly, say, if Putin decides to use tactical nuclear weapons or if Nato intervenes directly. If either side accidentally uses force, or if Xi issues an ultimatum to Taiwan out of nationalist fervor, a larger conflict may break out.
I combine these various options to create my four scenarios. I contrast each to a decade from the 20th century to serve as an example. This is done to highlight the differences between potential futures and the current problems, not to imply that history will repeat itself.
Many observers believed the “roaring twenties” would soon return when the pandemic seemed to be coming to an end. Following the First World War, a brief period of international cooperation, resumed trade, and economies started to recover thanks to the League of Nations. This was the original jazz age. A contemporary equivalent is unquestionably still a possibility, especially if global tensions ease and the economy recovers quickly.
We could also envision a global economic recovery without a corresponding drop in tensions. It reminds me of the early 1980s, when Paul Volcker, the US Federal Reserve chairman, took forceful action to lower inflation. Growth resumed after a brief recession, and the stock market soared. Globally, the situation wasn’t as favorable. The US-Soviet detente of the 1970s came to an end with the corresponding boycotts of the 1980 and 1984 Olympics, a proxy war in Afghanistan, and a resurgent nuclear arms race.
The 1970s are my third example. Due to their high prices, persistently high unemployment rates, and extensive labor unrest, they are frequently cited as an example of stagflation. However, there were fewer conflicts worldwide—at least among the superpowers. In The Spy Who Loved Me, James Bond worked with a Soviet agent to save the world, and the film did a fantastic job of capturing the atmosphere.
Compared to the 1930s, a turbulent decade in the 20th century that was characterized by high unemployment, sluggish growth, and erratic economic conditions. Fascism destroyed neo-democracies, tensions increased around the world, and a catastrophe that is still unparalleled in human history took place.
The world of today is very different from the eras portrayed in these scenarios. Global supply chains and financial systems have significantly increased economic interdependence, increased stakeholder power, and reached previously unheard-of levels of connectivity. One would like to think that the horrors of the 20th century and the unfathomable destruction of contemporary weapons will stop conflicts from getting worse.
However, the contrast between the two eras demonstrates how even minor adjustments to just two variables can distinguish between an excellent situation and one that is good, bad, or truly terrible. Which choice is most likely is the wrong question to pose. For government officials, business leaders, and the general public, it is more important to understand that the old world order is no longer valid.
The organizations that make decisions based on a strong sense of purpose and core values—rather than on rigid strategies or action plans—are the most resilient. Despite the fact that globalization won’t suddenly end, businesses will increasingly make decisions that go beyond locating the best supplier or the largest possible market.
Additionally, aiming for maximum efficiency for businesses in the coming years is probably not a good idea. Cash will be king, while room for error and flexibility are advantageous. Ideally before they are asked about their China business, how they would handle labor unrest, or whether they support free and fair elections, business leaders must be proactive in communicating their values.
This period of disorder may last for a short while or last for a long time, and depending on the sector and location, it may have minor or significant effects on organizations and societies. We should all concentrate on the underlying dynamics and take into account how they might affect business, government, and society in order to successfully navigate the rapids ahead.
Xi Jinping’s speech, “Zero-Covid and zero solutions,”
Most Chinese people don’t usually pay much attention to these leaders’ protracted, formulaic, set-piece speeches.
They were, however, alert for any indications that the country’s stringent Covid amelioration measures might be loosened following the Communist Party Congress.
No, replied Chinese President Xi Jinping simply.
He declared that zero-Covid would not be compromised because it was necessary to put saving lives first. Lockdowns, mass testing, health code scanning, quarantines, and travel restrictions will all continue to be in effect for the foreseeable future.
The detrimental effects of the policy on society and the economy were not even hinted at.
The government’s other major issues, which went unmentioned, such as the property crisis and rising youth unemployment,
Instead, the almost two-hour-long speech offered few substantive solutions to China’s problems and was largely devoted to tired Party platitudes.
If university graduates are unable to find employment in the tech sector as a result of government crackdowns on these companies, Xi Jinping’s advice to “follow the Party’s guidance… striving to be the new generation, building a modern socialist country” won’t be much comfort.
When Mr. Xi brought up the unification of the mainland and Taiwan, the most enthusiastic response—unquestionably scripted—came.
Beijing would support economic cooperation with the island and sincerely pursue peaceful unification, he added, adding that the Party would “never promise to renounce the use of force as an option.”
He also defended Hong Kong’s harshly criticized state security law, asserting that it had restored order to the city.
In order to justify the demolition and modifications of numerous mosques in the predominantly Muslim provinces of Ningxia and Xinjiang in northern China, he further asserted that religions in these areas must be “Chinese in orientation.”
Structures that were thought to reflect an Arab conception of Islam have been replaced by ones with a more Chinese aesthetic.
There were a few additional elements, and they weren’t ignored.
Former leader Jiang Zemin, who is currently 96 years old and might be too frail to attend, wasn’t there. Former presidents Hu Jintao and Wen Jiabao were present on stage with Mr. Xi.
Zhang Gaoli, a former vice premier of China, was also in attendance and sat in the first row of the podium. Since Chinese tennis player Peng Shuai accused him of sexual assault last year, this was his first appearance in public.
The 75-year-old hasn’t addressed the media’s accusation. However, the Xi administration does have a compelling story to tell about environmental programs and climate change.
The congress got underway in Beijing under a clear, blue sky. At one point, this was unusual for the capital. Now more than ever, the days with high pollution levels stand out.
China’s leader said: “We will promote low-carbon lifestyles and support low-carbon businesses. We’ll do more to prevent pollution. We’ll work to eliminate all harmful pollution “.
However, coal-fired power won’t be phased out until the new energy sources are established. He said, “We’re making the new before we get rid of the old.”
Although Xi Jinping acknowledged that progress had been made in the fight against poverty, there may still be a sizable income gap between the richest and poorest Chinese citizens.
Your understanding of the world would be distorted if you were to watch this speech without being aware of the current circumstances in China. The main message of the speech was that, despite China’s rapid development under the leadership of the Communist Party, the country is currently going through an unprecedented degree of economic unpredictability.
