Coined for military operations, the acronym for a volatile, uncertain, complex, and ambiguous external environment has become highly used in management and in economics when explaining operating environments. The past few years has reaffirmed that we are truly living in a VUCA world and looking into 2022 the trend is expected to continue.
Globally, the spread of the omicron variant is already restarting a phase of measures and lockdowns which will further impact already strained supply chains and increase the uncertainty around a robust economic recovery. Risks to the global economy remain on the downside as global inflation concerns have already forced central banks to review their monetary policy stance. Gone was talk from the Federal Reserve, European Central Bank or Bank of England that rapidly rising prices were temporary, transitory, or transient. Instead, they began to worry about high inflation being "persistent”.
There are two main challenges the global economy faces: supply-chain constraints and energy inflation.
The shipping bottlenecks have exposed one of the most serious threats to the global economy as it continues to slowly emerge from the pandemic: whether the worldwide shipping jam remains gridlocked or begins to flow again in 2022. If the bottlenecks persist, freight costs will remain high, space for cargo on ships will be limited and retailers and manufacturers will have to endure chronic delays. That could in turn fuel inflation, prompt supply chain upheavals and accelerate consolidation of shipping networks, fundamentally changing world trade.
On the energy front, the global economy was shaken by a major crisis in 2021. Prices for oil, gas and electricity surged as our economies reopened after the shutdowns imposed in response to the coronavirus (Covid-19) outbreak. Though last year’s events were extraordinary on many levels, spikes in energy prices are a common phenomenon. Since the 1970s, sharp movements in energy prices have been a recurring source of economic dislocations and volatility. And yet, the roots of today’s shock are likely to go deeper. While in the past energy prices often fell as quickly as they rose, the need to step up the fight against climate change may imply that fossil fuel prices will now not only have to stay elevated, but even must keep rising if we are to meet the goals of the Paris climate agreement. This in turn highlights an important challenge that the world is facing in 2022, climate change.
The pandemic highlighted the intensifying dangers of non-economic factors caused or exacerbated by climate change. It is expected that climate change will have a number of consequences, including more frequent and intense extreme weather as well as longer warm seasons. The transition to net-zero emissions is not merely an ideal goal: it is a necessity. The faster countries manage this transition, the more competitive they will remain, and the fewer social and economic disruptions they will experience. To this end, finance will play a key role.
The Covid-19 crisis has put huge pressure on many developing countries’ public finances, leaving governments struggling with rising debt levels as they try to fight the pandemic. This has reduced the capacity of governments to target climate change investments. It is therefore imperative for the international community to explore methods which can address the climate crisis, the pandemic-induced debt crunch, and the need to boost development finance. It is certainly attractive to tackle these issues jointly given that climate finance needs to be mobilized from the rich countries, the main polluters, to the low-income countries who also happen to bear a disproportionate large burden from climate change. European Commission President Ursula von der Leyen has said that "major economies do have a special duty to the least developed and most vulnerable countries,” while International Monetary Fund Managing Director Kristalina Georgieva said that "it makes sense” to seek to address debt pressures and the climate crisis jointly. The idea is to arrange "green debt swaps.”
The idea is not new; something similar has been tested since the 1980s. During that lost decade, so-called Brady bonds were the main item on an international "menu” of debt-restructuring instruments. Debtors used official loans from the IMF and the World Bank to acquire US Treasury bonds as collateral, allowing them to exchange existing bank loans at a heavy discount for tradable, guaranteed Brady bonds. In addition to this possibility, it will be essential to mobilise private finance including the use of established market mechanisms such as carbon pricing.
As we look ahead, the operating environment remains highly uncertain on a global level. Global cooperation and focus on addressing key global challenges through multi-lateral solutions will be critical. The pandemic has highlighted that we are only as strong as our weakest link and the scale of the challenges we face demand a strong multilateral solution. Agility and adaptability are in fact going to be key ingredients for resilience in 2022.
JP Fabri is a co-founding partner of Seed, an international research driven advisory firm with offices in Europe and the Middle East.
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jp@seedconsultancy.com