@ the IERP® Global Conference, October 2022

Presented by Dr Shankaran Nambiar, Senior Research Fellow, Malaysian Institute of Economic Research (MIER), this session covered geopolitical and supply chain disruption, inflationary pressures, global trade and output, and volatility and risk. Things are not as they seem, Dr Shankaran said, acknowledging that the still-sombre mood, after almost three years of pandemic conditions, continued to prevail in many environments. But despite many less-than-positive signs, there is still hope that the world will not slide into economic recession. He identified the Russia-Ukraine conflict and the US-China trade war as major geopolitical disruptions that will need constant and careful monitoring.

Sharing thoughts on the global outlook and the kind of risks that could emerge, he qualified his opinions as tentative. “One cannot be certain about how things will unfold,” he said. “It is also tentative in the sense that we are trying to make sense of what is happening and how it will affect the economy.” He added that it was difficult to prepare responses to the risks that were unfolding. A major factor was still the Covid-19 virus, and while another full-blown wave was unlikely, the presence of new variants made it a force still to be reckoned with. The virus was also responsible for some of the policies being implemented by countries around the world, most notably China, with its zero-infection stance.

He stressed that there was a strong relationship between what happens in the public health sphere and how it affects things where the value chain is concerned. Global trade, however, has shown an improvement. “All happenings are a consequence of what is happening on the global scale,” he said, with the three major players – US, Russia and China – trying to sort things out and, to a certain extent, reset global order; in the process, there will be fallout. Identifying the most pressing problem as the current Russia/Ukraine conflict, he said the most worrying aspect of this was that it was not expected to come to a close anytime soon, instead, “The war is moving into a more dynamic phase.”

Even the most optimistic projections see it receding possibly only in 2023; the possibility of escalation, however, is more likely. The impact of the conflict is expected to cause a rise in prices of items such as animal and vegetable fats, fertilisers, mineral fuels, oil, cereals and wheat; the prices of these inevitably affect prices of other goods. The standoff between the West and Russia has resulted in the EU and US responding with economic sanctions against Russia – particularly in the financial, energy and technology sectors. Because of the way markets were related, innocent countries were likely to experience the domino effect of this.

On the issue of the US-China trade war, he said that this was actually worsening. One factor was the recent return to China of 1,200intellectuals/scientists/academics, from the US. “This is a very important indication of the policy stance the US is taking,” he said. “It’s something that goes beyond party lines; it seems to be a bipartisan approach, a part of the reset or an attempt to ensure that the US is in control of the global economy.” Malaysia was originally thought to be one of the countries that could actually benefit from the trade tensions, but it has turned out not to be the case. “The greatest recipients of FDI have been Vietnam and Indonesia,” he said.

Malaysia is not doing as well as it should be doing, although the situation is not as dire as some market watchers believe. China does figure very importantly in the scheme of things; Malaysia’s economy is affected by what happens in China. “There is likely to be a technological decoupling that the US is looking at,” he said. “It is trying to be independent of China, trying to shift the focus of production to the US. This will have some impact on what happens in Malaysia; probably not immediately, but in the next five to ten years. There will be restructuring of some sort.” On supply chain disruption, he said there had been improvement to most of the conditions affecting shipping.

However, although there have been improvements in the area of logistics, congestion at ports has not been completely resolved. Arising from the Russia/Ukraine geopolitical conflict, food prices have increased; energy prices have increased as well. But there is another factor coming into play: the fear of decreased global demand. Conflicts in Libya and Iran; Iran’s possible response and the kind of interaction with the US on its nuclear accord;the possibility of Russia cutting down its production and what happens with OPEC, will all cause some level of concern regarding global supply. On the demand side, there is a fear of moving into global recession.

“There seems to be some flattening of inflation but all this is setting off alarm bells,” he said. “Measures of risk indicate there are massive concerns. Uncertainties and risks seem to be rising, and are not expected to come down anytime soon.” Global volatility, another measure of risk, seems to be high, although not at pre-pandemic levels; the global economy is likely to go into a slowdown. The purchasing managers’ index is down-trending, and input prices are rising. However, there is hope. “There is a possibility that global trade will go up, although not at a fast pace,” he said. “It will increase, but moderately.”

He flagged two other concerns: the semiconductor industry which he said appeared to have reached the end of its upbeat cycle. This was flattening, spurring some commentators to point to the possibility of this industry being more moderate, going into 2023. US policies will also contribute to the global slowdown of the industry. The other concern was the aggressive stance of the US Federal Reserve regarding its rate hikes. “It seems very determined to keep inflation low, and another round of rate hikes is likely – which is fine for the US,” he said. “This will be able to curb inflation but what happens in the US is not restricted to the US. It will spill all over the world.”

This has already happened; many countries have already been affected, including the UK, Japan, India and Malaysia among others. “Going forward, with all of these risks, the outlook is not terribly optimistic,” he said. “Locally, forecasts have been cut down.” He concluded, however, that these factors could contribute to an exciting time ahead for risk practitioners. Almost all these factors were generated outside the country; thus, there was not very much that could be done except to better manage the country’s internal matters.