A world of heat and headwinds

The outlook for the global economy has gone from optimistic to gloomy in just a few months, due to the rise of the Delta variant, climate disasters and previously under-supplied supply chain disruptions. estimated. In fact, it is now hard not to conclude that future growth and development is in jeopardy.

Just three months ago, the global economy appeared to be on track for a relatively robust recovery. The supply of Covid-19 vaccines had expanded in developed countries, giving hope that it would spread to developing countries in the second half of 2021 and into 2022. Many economies were posting impressive growth figures with the reopening of sectors wiped out by the pandemic. While clogged supply chains had produced a multitude of shortages and high prices for key inputs, these were seen as merely transitory problems.

The world looks very different now. The Delta variant is spreading rapidly, including in developed countries and among cohorts hitherto less vulnerable to the virus. Unvaccinated parts of the world – mostly lower middle-income and low-income countries – are now more vulnerable than ever.

In addition, the vaccine supply chain is failing. The main reason is that developed countries have option contracts to purchase many more doses of vaccine than they need (even after taking into account the expansion of their youth and immunization programs. administration of booster vaccines). This lengthens the vaccine queue, thus delaying the arrival of vaccines in much of the developing world.

The rich world’s “oversupply” must be released and made available for purchase by other countries. A program to finance such purchases would not be very costly on a global scale (in the range of US $ 60-70 billion) and would provide immediate and long-term benefits in controlling the virus and preventing the emergence of the virus. new dangerous variants.

Another problem is that global supply chains have been more severely disrupted than previously thought. It is now evident that the resulting shortages – in labor, semiconductors (which are used in countless industries), building materials, containers and shipping capacity – do not. will not go away anytime soon. Surveys indicate that inflationary effects are widespread across sectors and countries, and are likely to act as a persistent obstacle to recovery and growth.

Adding to the uncertainty, there have been pandemic-induced changes in national and global supply chains that are not yet fully understood and will most likely be difficult to reverse. Indeed, the disruptions resulting from the pandemic are broader and appear to be a bigger drag on the economy than the recent trade war between the United States and China.

But the most telling development of the past three months has been the dramatic increase in the frequency, severity and global scope of extreme weather events: storms, droughts, heat waves, higher average temperatures, fires and floods. Earlier this month, the Intergovernmental Panel on Climate Change released a new report that was bluntly called a “code red for humanity” announcement. The collective judgment of the scientific community suggests that this year’s brutal experiment is not an outlier; this is the new climatic normal.

So we can expect more of the same (and probably much worse) for the next 20 to 30 years. The window to prevent the types of events we have seen this summer is closed. The challenge now is to accelerate the pace of greenhouse gas emissions reductions to avoid even more serious – and potentially deadly – climate consequences in the decades to come.

Given the economic and climatic headwinds that the world is facing, and that they will blow in the longer term, future growth and development are at risk. In addition to being a clear drag on growth, current supply chain disruptions may contribute to inflationary pressures that will require a monetary policy response.

Likewise, an ever-evolving virus that becomes a semi-permanent feature of life will retard global growth and specialization. International travel will continue to struggle to recover. And while digital platforms can serve as partial substitutes, barriers to mobility will eventually affect all of the global economic and financial ecosystems that support innovation.

In the past, extreme weather events were rare and local enough that the risks did not really affect the global macroeconomic outlook. But the new model already looks different. It is difficult to imagine a region that is not subject to high climatic risks. A recent US Federal Reserve document warns that climate change could increase the frequency and severity of economic contractions, thereby reducing growth. Beyond the resources devoted to steering the recovery, this new reality must ultimately be reflected in the prices of assets and insurance.

Ultimately, climate change is quickly becoming a significant factor in macroeconomic performance. While we lack precise measures of economic fragility (i.e., resilience to shocks), it is difficult not to conclude that the global economy, and in particular some of its most vulnerable parts , becomes more fragile. Low-income developing countries already face significant challenges when it comes to demographic trends, adapting growth models to the digital age, and addressing localized governance issues. Add in the tax constraints, climate volatility and pressure, and the long queue for vaccines, and you have everything you need for a perfect storm.

Much of this is already incorporated into our immediate future. But not everything is. Capital markets, for example, seem to be adjusting to the new reality, and solving the challenge of the global vaccine supply is neither incredibly complex nor prohibitive. All it takes is multilateral focus and engagement.

The United Nations Climate Change Conference (COP26) in Glasgow in November will be crucial, and even more difficult than previous climate change conferences. The objective is to strengthen the national decarbonization commitments made in Paris during COP21, so that the global aggregate is consistent with a carbon budget that limits global warming to 1.5 degrees Celsius compared to the pre-industrial level.

Finally, as extreme weather events will occur more frequently and on a global scale – hitting randomly almost anywhere – private and social insurance systems will need a major upgrade to become effective. multinational company. We may need a new international financial institution to deal with this, in close collaboration with the International Monetary Fund and the World Bank.

Michael Spence, Nobel Laureate in Economics, is Professor Emeritus at Stanford University and Principal Investigator at the Hoover Institution.

Copyright: Project union


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