Sometimes, events that unfold in close proximity to each other are characterized as pivotal, when their effects on the developments that follow are decisive and with a long-term horizon. As such, they signal a change in the order of things and our subsequent behavior. These events may be the culmination of previous processes, but when they do occur they are turning points with the crucial importance we mentioned. The period 2020-21 is such a moment.
It is the outbreak of the pandemic and our reactions to it, in the health, political and economic fields. These are the climate initiatives and the significant consensus reached between the vast majority of nations. The cessation of global supply chains and, perhaps, the culmination of globalization marked by trade disputes and new competition. It is also the end of China's export economic model, based on low production costs.
Also, the changing role of the European Union and the renewed efforts to deepen its integration. Each of these events is of particular importance because it connects groups of nations and, directly or indirectly, will have a long-term and lasting impact on the world system. Some of them we will discuss here and others we will leave for another time.
The Covid-19 pandemic has triggered a deep global recession and consequences that are not yet fully understood. The effects of the pandemic will be greater and more lasting for some sectors, such as transport and tourism, and less so for others. It is now clear that a global pandemic requires global solutions and global cooperation. Our response to the pandemic outbreak was rapid in terms of vaccine development, but not in terms of their distribution. Vaccination rates were high in developed countries, but very low in many developing countries. The pandemic thus becomes endemic and 2022 will be the year we will learn to live with it, without locking the economy.
The labor market
Perhaps the biggest and most important effect of the pandemic was to speed up certain processes, namely the digital transformation. The digital age is affecting almost all levels of economic activity. The labor market, business administration and the organization and structure of economies. Distance work becomes an integral part of the new regularity and this differentiates the choices. People for whom distances and hours previously prevented their participation in the labor market, are active for the first time. People for whom the same arrangements have limited their possibilities, leave permanent jobs and choose to be self-employed. The provision of specialized services with specialized knowledge moves from the company level to the sector level, or to the wider economy. This contributes to further specialization, with benefits for productivity and economies of scale. At a transitional stage, however, there are consequences, such as labor shortages and skills mismatches. These trends, in general, will continue, with even greater intensity, and will change the way we work and get paid, as well as the way companies organize their operations and control systems.
Debt increase
We avoided a deeper economic crisis, which could have happened if we had further extended the lockdowns of our economies (lockdowns), which would have led to bankruptcies and permanent destruction of production capacity. Our measures and adaptability reduced the cost of the pandemic with each successive wave. But there are important consequences. We saved our productive network almost entirely, subsidizing the employment and turnover of companies. Governments have incurred huge expenditures and public debt in most countries has risen to 20 percentage points of GDP, perhaps more. Central banks have boosted bond markets, making it easier for governments to finance their deficits and raise additional debt. As a result, their balance sheets skyrocketed. Many countries are now more indebted than ever. Therefore, the data on fiscal and monetary policy have changed. For many countries, budget margins have narrowed and they will not be able to meet the same challenges, just as easily as other countries, in a comparatively better fiscal position.
The recovery plan
It may be too early to say for sure, but the “Next Generation EU” design could change the course of European integration. It is a new initiative, with an important political tone. It is not just a means of financing the post-pandemic recovery. It mainly concerns the future. The transformation of economies and societies in the coming decades will not be possible without greater convergence between Member States. Huge key investments and structural reforms will be required. In relation to the latter, it is not always properly understood what is included, because their content is not fixed. They are not necessarily liberal or neoliberal economic policies. This has happened in previous episodes of economic transformation. Not this time. Now, the separation between the Public and the private sector is changing in favor of the State. The role of the state and its relationship with the private sector is changing. There is a great need for infrastructure projects, which will be implemented through government initiatives. More and better quality costs will be needed.
Climate change
The United Nations Conference on Climate Change, COP26, in Glasgow last November may not have achieved the expected results, but almost all nations have agreed on the need for measures and actions to achieve zero clean emissions. This goal may not be achieved by 2050, as is desirable, but it is extremely important that all nations take steps in this direction at the same time. In Europe, the goals of the green transition require huge investments. It is estimated that the additional investment required will amount to 2 percentage points of GDP per year, by 2050. This is a huge economic undertaking and other issues are being raised. Debtor member states will find it difficult to meet this challenge on their own. The resources of the “Next Generation European Union” project are not sufficient to achieve the objectives and alternative programs may be needed. This is the basis of the dialogue on fiscal rules that we will return to in 2023, as well as the possibility of a more permanent fiscal policy tool, which will help Member States with specific investment objectives.
Logistics chains
The so-called global supply chains are a familiar issue, which has been rekindled by trade disputes between China and the United States and the Covid-19 pandemic. In essence, this is the phenomenon of globalization, the trend for large and multinational production chains. Globalization grew rapidly in the 1990s and 2000s. The global financial crisis of 2008 led to a similar shutdown of supply chains. Then, as now, there was talk of the culmination of globalization. The repatriation of certain productive activities, such as semiconductors, takes place within this framework. The US-China rivalry began with Trump and continues under the Biden administration, with significant implications, both economic and geopolitical.
What to expect
After all this, what can we expect in 2022? We end up. Fiscal and monetary policies will retain their expansionary appeal, but to a lesser extent. The global economic recovery will remain strong, but it will slow down for many reasons. Inflationary pressures will remain strong due to high energy prices and supply chain problems. Oil and gas prices will remain high and may rise slightly more. Labor markets will be under increasing pressure due to skills mismatches and because labor demand will grow faster than supply.
Central Banks will restrict bond markets and in the US the Federal Reserve will begin to raises its interest rates. The ECB will end its Extraordinary Pandemic Purchasing Program in March and will likely close its previous asset purchasing program by the end of the year. Europe will discuss its fiscal architecture. In other words, the year will be full. But it will be a prelude to a decade that can be more turbulent than & # 8217; what is foreseen now, as a new regularity will emerge at the end of this road.
Ioannis Tirkidis is the Director of Financial Research at Bank of Cyprus. The views are personal. The article is also published in the block of the Cyprus Society for Economic Studies (cypruseconomicsociety.org/blog)
