This is a sequel to a previous post you may want to read first.
Over the last two years, we’ve tried to get to grips first with the pandemic and then its aftermath. Clearly, it was a massive systemic shock with a lot of far-reaching consequences, including second- and third-order effects. Like it or not, we can’t go back to our 2019 normalcy. On February 24, another systemic shock added a new set of reasons why it’s impossible.
Early estimates show that the war in Ukraine could reduce global gross domestic product (GDP) by about 1% (or $1 trillion) and add 3% to global inflation. In terms of GDP, the impact would still be smaller than that of the pandemic, which shrank global GDP by $3 trillion (around 3%) in 2020 alone, not counting the effects in 2021 and beyond.
However, on a global level, the 2020 economic shock is almost forgotten: in October, the IMF estimated global GDP growth at almost 6% in 2021 and 5% in 2022. But while GDP growth recovered, inflation remains high. In October, the IMF projected a global inflation rate of 4.35% in 2021 and 3.81% in 2022 – significantly up from previous years. Adding 3 percentage points would bring us to a whopping 7% global inflation rate this year – a level last seen during the 2008 financial crisis.
Inflation is here to stay
It looks as if we can answer the question left open in a previous piece: for the foreseeable future, inflation is here to stay. In 2020, economists Charles Goodhart and Manoj Pradhan predicted an inflation revival as the result of global demographic change. Inflation will have massive consequences for consumer behaviour. Consumers will likely slash discretionary spending:
Overall, in the next three months, more households reported plans to reduce rather than increase discretionary spending on dining out, travel and entertainment (37%), large purchases such as appliances and cars (30%) and retail shopping for clothing, electronics and durable goods (30%). At the same time, they plan to increase spending on paying bills and loans such as utilities and credit cards (34%), medical care (27%) and retirement funds/investing (26%).
These are numbers from a US consumer survey conducted in early February, thus before the recent escalation. Again, we see a pattern familiar from the pandemic: the crisis accelerates and exacerbates trends and change that were there before.
But the magnitude of the current systemic shock challenges a lot of assumptions we’ve operated with at least since the fall of the Iron Curtain in 1989/1991. Some assumptions are even older. “Germany had outsourced its security to the United States, its energy needs to Russia and its export-led growth to China,” as Constanze Stelzenmüller puts it.
We took for granted that Russia will deliver oil and gas in exchange for hard foreign currency, because that’s what the USSR and Russia always did. Germany heavily relies on the Russian gas supply, and we cannot change this overnight. Trying to do so would mean significant losses, either economically or in standards of living, and possibly both.
Basic assumptions are shattered
The strongest symbol of this intertwining is Germany’s former chancellor Gerhard Schröder, who continues to serve on the boards of Russian oil and gas companies. Another symbol was the sponsorship of Gazprom at football club Schalke 04, which is now terminated. Less visible, but more significant is Gazprom’s ownership of Germany’s largest gas storage facility. This poses significant risks – right now, it’s nearly empty.
Almost certainly, the new systemic shock will accelerate the transition towards renewable energy. But in the meantime, it may also lead to a renaissance of oil and coal power plants. Even another shift of direction in the nuclear phase-out seems possible, with the last remaining nuclear plants getting a life extension. The war has shattered basic assumptions of Germany’s energy policy.
The ongoing disentanglement of Russian and Western economies will extend well beyond energy. In fact, it’s moving faster in economic sectors less dependent on Russian supply. Many Western companies suspended or divested their operations in Russia. It increasingly looks as if another basic assumption is coming to an end: that global trade has built a robust web of interrelationships, leading to peace and stability.
The Economist now warns of a dangerous fragmentation of the world economy. Supply chains, already under pandemic stress, will fracture further, slowing growth and fueling inflation. The German automotive industry is reducing production because of missing parts made in Ukraine that could not be delivered. Again, we see a shock that challenges globalisation, at least in its currently dominating flavour. Supply chains must and will reconfigure.
A systemic shock for globalisation
The KOF Globalisation Index shows that economic globalisation was already slightly declining before the pandemic and before the full impact of Brexit. The long-term trend towards globalisation started to slow down almost two decades ago and has been flat since 2015. And what’s perhaps even more worrying:
Social globalisation has decreased somewhat. In particular, the degree of interpersonal globalisation, i.e. the degree of cross-border personal contacts, has declined. The degree of political globalisation was slightly higher than in the previous year. The number of embassies and NGOs has thus increased recently.
However, the second data point – a slightly higher degree of political globalisation – can still give us some hope. We’ll need robust global political institutions and relationships to weather the storm.
In March 2022, we find ourselves in a world different from 2019. The global political landscape has changed. The economic situation is different. Inflation will stay on the agenda. Supply chains are under pressure. Energy prices are soaring. Not to mention healthcare, the pandemic and its aftermath, new patterns of work, shopping, entertainment, and family life, consumer preferences, choices, changes of behaviour and habits.
Marketeers now need to assess the basic assumptions of their marketing. Beyond the immediate political impact, they need to answer questions like these:
- Does our market analysis need an update?
- How do we adapt our communication, advertising, and promotion?
- Is our pricing strategy still valid?
- Must we reconfigure our supply chains?
- And what about our products?
The time to start this assessment is now. But it will take time. We don’t yet know what our post-pandemic, post-post-Cold-War world will look like. We only know that it will be different.