EDC’s Economics team identifies the challenges and opportunities facing Canadian companies, including the impact of COVID-19, global protectionism, climate change and social unrest.
EDC’s Economics team identifies the challenges and opportunities facing Canadian companies, including the impact of COVID-19, global protectionism, climate change and social unrest.
The sudden and sharp impact of COVID-19 placed an unprecedented strain on the global economy. The sustained return of economic activity to pre-pandemic levels will be determined by the pace and effectiveness of the vaccine rollout, the emergence of variants and future waves, subsequent lockdowns, and our ability to manage any enduring threat of transmission. The trend to watch is whether new variants emerge that continue to present global health challenges, warranting widespread economic responses. Such a scenario would cause growth to stall and delay any sustainable recovery. COVID-19 has also raised the spectre of other global health threats and the impact of large-scale, co-ordinated efforts to combat them.
In the 20 years since China joined the World Trade Organization (WTO), it’s emerged as the main competitor to the United States in trade, geopolitics and security. This dynamic presents challenges when problems demand a co-ordinated global response such as climate change, and increases the potential of impacts to other countries or interests that are caught in its wake. A renewed surge in Chinese nationalism also threatens key international production chains. This, in addition to the country’s dominance over much of the renewable energy supply chain, reinforces the 21st-century rotation of the global economy. At more than US$520 billion, Chinese lending to the developing world already makes Beijing a bigger lender than the World Bank or the International Monetary Fund (IMF). And the signing of the Regional Comprehensive Economic Partnership (RCEP) covers double the combined populations of the Canada-United States-Mexico Agreement (CUSMA) and the Trans-Pacific Partnership (TPP) and accounts for 30% of the global economy. As such, China is becoming increasingly linked to the overall global economic performance. Canadian companies must watch the evolution of this trend to protect themselves from emerging threats and capitalize on new opportunities.
As economies emerge from a deliberate lockdown of activity, and government stimulus works its way through the system, demand pressures are intensifying in the context of ongoing supply headwinds. While the industrial capacity exists, shutdowns have led to a scarcity of key inputs, both manufactured and resource based. It may be some time before supply can adjust to feverish levels of demand, especially as concerns around the Delta variant persist. Various transport bottlenecks, including stretched port capacity and container shortages, are further exacerbating supply chain logjams. And then there’s the impact of labour shortages, which are feeding wage pressures in key areas. Add all this together and pricing pressures go beyond the more volatile price elements, with so-called “core” prices also up sharply. Aside from the disruptive impact that inflation can have on the economic recovery itself, faster than anticipated price growth may require central banks to be more aggressive in hiking interest rates. But higher rates won’t be without consequence. Low-interest borrowing is currently allowing governments to spend and is underpinning historic stock market valuations and abundant credit. An abrupt change in the interest rate outlook could be painful, hitting equity and credit markets, taking the shine off certain commodities and impacting currency stability. The move would expose overleveraged corporations and reverse capital flows into emerging markets that have been experimenting with larger budget deficits and unconventional monetary policy themselves. Impacts could persist beyond the short term.
In many countries, the pandemic required significantly higher fiscal spending. With low interest rates, governments across the board took on more debt. Advanced economies poured 28% of gross domestic product (GDP) equivalent in fiscal and monetary support to cushion the impact of the crisis on their businesses and people. Countries with diversified economies and that manage reserve currencies (e.g. USD, euro and yen) should be able to deal with elevated debt levels long enough to complete vaccination programs and realize their recoveries. While this includes most developed economies, very high-debt levels in some southern European countries leave elements of the eurozone more vulnerable to rising borrowing costs. For emerging markets, risks remain elevated as they wait for the onset of growth and stability. Many governments, particularly those with more limited access to international debt markets, are depending on a continuation of accommodative global financial conditions. With the U.S. Federal Reserve and the European Central Bank (ECB) expected to begin tightening in the coming years, emerging markets could see higher debt servicing costs, currency depreciations and capital outflows.
The COVID-19-induced economic shock has been highly uneven across industries, in some cases accelerating disruptive trends that had begun taking shape prior to the crisis. Few sectors such as mining, agriculture and manufacturing will escape the fast-tracked push toward digitization and automation. The impacts of automation are fundamentally reshaping traditional industries’ demand for labour, capital and technology. New technologies such as 3D printing, augmented and virtual reality, sensors, artificial intelligence, quantum computing and robotics also have the potential to disrupt nearly any industry. The competitiveness of companies in these technologies will determine how prosperous they’ll be in the decades ahead.
As extreme weather events become more frequent and intense, the level of physical risk will increase. The impacts are likely to be felt across all regions, sectors, and systems. Risks to health, livelihoods, food security, water supply, human security, and economic growth are all projected to be affected. While the magnitude of the impacts will be determined by the degree of global warming, the trend is certain to continue unless the world can meet its commitments to reduce net carbon emissions to zero. Climate modelling shows the actions taken over the next few years will be critical to avoiding more extreme impacts, with costs ranging in the billions—if not trillions—of dollars. One example of its impact will be on the agricultural sector. Rising temperatures and diverging weather patterns have already started impacting farmers in Canada. Disruptions in weather patterns jeopardize farmers’ ability to produce enough crops and cattle feed. These trends are expected to continue, potentially causing a large-scale disruption to Canadian agriculture and food security. While climate change is weighted heavily on the risk side, opportunities exist as well. Bloomberg expects at least US$5 trillion to be invested in new renewable energy capacity by 2030.
International recognition of the need for urgent action on climate and other environmental, social and governance (ESG) challenges has led to increased pressure on governments and industry to demonstrate stronger commitments in these areas. Transparent disclosure and proactive reporting are becoming the norm, with an increased focus on ties to executive compensation. In many cases, these commitments are moving from voluntary programs to regulatory requirements and prompting convergence around ESG standards and targets. While the trend is raising the cost of doing business across sectors, it also opens opportunity to enhance returns and access cheaper credit. Going forward, performance in these areas will offer some a competitive advantage and price others out of the market. The risk here is that many companies may not be ready for these changes or haven’t appropriately factored in transitional costs.
Forty years of steadily increasing global inequality, exacerbated by ongoing demographic shifts, urbanization, climate change and deeply entrenched political systems, have led to growing social unrest worldwide. Deteriorating socioeconomic conditions and reduced economic opportunities in the wake of the most recent economic crises have further worsened conditions for the most vulnerable, pushing more people into poverty and reversing many of the gains that gave rise to growing middle classes. The term “K-shaped recovery” was originally used to describe the divergent fortunes of the haves versus haves-nots as we emerge from the COVID-19-induced economic crisis. Mass protests in major capital cities are becoming more frequent and sustained, as citizens grow frustrated with ineffective government responses. Higher unemployment and lower economic growth are exacerbating social tensions in some countries that were already experiencing high levels of unrest, leading to more violence and instability. While most pronounced in developing countries, advanced economies aren’t immune to this growing trend.
Historically, protectionism hasn’t been an uncommon response to large economic shocks, focused on employment and the protection of jobs. The new global protectionism, influenced by the changing global system and an increase in populist rhetoric, appears as much a political response as an economic one. With the experience of COVID-19 fresh in their minds, countries are increasingly moving to protect strategic industries and localize production, resulting in an escalation in trade and diplomatic tensions, which can disrupt global supply chains. What’s more, if “data is the new oil,” information barriers across borders will further inhibit economic activity. Heightened protectionism would give rise to slower overall trade growth and targeted barriers in key sectors. As a country dependent on global trade, the shift away from 50 years’ worth of increasing liberalization is a key concern.
While the push toward greater digitization has become an essential move for many businesses, it also raises the likelihood and impact of cyber risk they’ll face. A 2020 study by the Center for Strategic and International Studies in Washington, D.C., concludes that cybercrime costs the world economy more than US$1 trillion annually, or just more than 1% of global GDP. The pace of this growing cost to businesses and governments is only expected to grow as international businesses continue to digitize their operations, supply chains and transactions, and as public or private entities rely even more on information technology to manage critical infrastructure.
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