A world without precedent
The Russian invasion of Ukraine and China's anti-Covid policy weighed heavily on global economic growth
Good morning! This is a year-end special edition of The Signal. This week we will publish a series of articles on what happened during 2022 and also give a peek into what to expect in 2023. Today, we write about how the world changed in 2022, with a focus on geopolitics, the global economy, and business.
If there is one overused term that deserves to be called the word of 2022, it would be “unprecedented”. In the long arc of history it has rarely happened that two wrong decisions principally influenced almost all major decisions made worldwide.
The first and most immediate was Russian president Vladimir Putin resolving to subjugate Ukraine. The second, Chinese president Xi Jinping’s zero-tolerance policy to stamp out Covid-19, was introduced earlier but emphasised with tremendous vigour in 2022. Together, they led to the biggest reset of international alignments since World War II and arguably the worst economic crisis after the oil shock of 1973.
Meanwhile, half of the world’s democracies are in retreat, and more countries are moving towards authoritarianism than those inching closer to democracy. Public frustration reached explosive levels during the year. So much so that the number of protests worldwide doubled between 2017 and 2022, according to the Global State of Democracy Report 2022 by the Institute of Democracy and Electoral Assistance (IDEA). Protests forced even an unprecedented rollback of state policy (zero-Covid) in authoritarian China. Sri Lankan president Mahinda Rajapaksa had to flee his crisis-hit country to escape mounting public anger.
According to the World Values Survey, a global research project that covers 77 countries, public faith in the value of democracy has declined. Only 47% of respondents believed that democracy is important. Moreover, 52% agreed with the idea of having a strong leader who does not have to bother with parliament or elections, up from 38% in 2009.
Most major economies, especially in Europe and America, would ring in the new year in firefighting mode as they struggle to hold back runaway prices. Asian countries, except China (for the moment), are better poised to weather the economic slowdown. India seems to be in a sweet spot as it has a year-long opportunity to lead the world with the G20 presidency. It is also emerging as a favourable corner for global investors. Yet, it will begin 2023 addressing neighbourhood challenges.
What the rest of the world went through in 2020 and 2021, the world’s most populous nation is enduring now. Hospitals, utilities, and civic systems are overwhelmed, the real death count is masked, and oxygen is in short supply. Covid-19 is spreading so fast that 250 million people were infected in 20 days. The variant spreading in China is a mutant of Omicron, and there is genuine concern that it may trigger another contagion globally.
While India is on red alert for the virus, it is also hypervigilant about the People’s Liberation Army at its eastern border. India battled both in 2020 and settled into an uncomfortable détente. While the country is much better equipped to deal with a virus outbreak, the rising frequency of border skirmishes is tricky. Seasoned experts believe they are designed to keep India unsettled rather than grab territory. The debilitating cyber attack on India’s premier medical institution, the All India Institute of Medical Sciences, was also said to be of the same piece. It is supposedly part of a strategic mind game that the neighbour is playing and will likely intensify in 2023.
The big shifts
India will be walking the tightrope as it tries to rebalance its equations in a world where the United States’ hegemonic power is being challenged by China even as it rallies allies to fight its old adversary, Russia, by proxy. In the wake of intensifying conflict, long-held doctrines are being rewritten.
Japan, the only country to have endured nuclear bombs, had held on to a pacifist defence policy since World War II. Not anymore. Prime Minister Fumio Kishida has cast it aside and decided to increase defence spending by 60%. The country has bought cruise missiles that can hit targets in Russia, North Korea and China, which it considers an unprecedented strategic challenge.
Japan is not alone. Sweden and Finland, which stood aloof until now, are joining the US-led North Atlantic Treaty Organisation or Nato. Europe’s largest economy, Germany, will start 2023 with a National Security Strategy, the first ever, and has also set up a €100 billion fund to modernise its military. It intends to get more active in the Indo-Pacific, where all the action is, as a guarantor of the rule-based world order.
India is a part of the US-led Indo-Pacific grouping QUAD, a primarily anti-China strategic bloc that did a bit of chest-thumping in May but has been rather quiet since. As India drew closer to the US, it had to do quite a bit of diplomatic juggling as the latter drifted apart from some countries like Saudi Arabia, with which India has a close partnership. In fact, the chill in the Saudi-US relationship runs parallel to the oil heavyweight’s increasing closeness with China. Saudi Arabia knows that Russia’s invasion of Ukraine has changed the global conversation on energy, and its importance as the world’s leading fossil fuel supplier will remain undiminished for the foreseeable future.
While the United Nations Climate Change Conference, COP27, held in the Egyptian seaside resort of Sharm El-Sheikh saw an unexpected breakthrough in “loss and damage” funding for vulnerable countries, the energy crisis created by Russia’s war has shaken the global resolve to move faster to green fuel sources. Europe, from where the loudest voices for the environment arise, is quietly securing fossil fuel sources other than Russia. The urgency is such that while Germany shut down the Nord Stream pipeline, it built a floating LNG terminal, which would have otherwise taken five years, in six months flat.
Russia’s war, which Putin finally acknowledged for what it is, and the US’ inability to get many large economies to wholeheartedly participate in implementing sanctions against it, are altering global business equations as well. As Europe breaks away from Russian gas and oil, China and India are stepping in. Russia is now India’s top source of oil.
Anti-Russia sanctions essentially comprised weaponisation of the international banking systems like never before. The West imposed one of the harshest and most surprising sanctions on Russia’s central bank. The unprecedented hit froze its $630 billion reserves, crippling the country’s external financing system.
The energy price shock and shortages fuelled inflation throughout the world, especially in Europe and the US. The US Federal Reserve reacted with force, repeatedly raising interest rates, which compounded economic pain. Despite rapidly escalating costs of living, the European Central Bank and the Bank of England were left with no choice but to raise rates too.
The cost-of-living crisis cost the UK prime minister Boris Johnson his job. His replacement, Liz Truss, had to quit in 44 days, becoming the shortest-serving prime minister after a disastrous economic policy pulled the rug from under the financial markets. Although the new prime minister, Rishi Sunak, has tried to make amends, the UK will begin 2023 in a recession. So will many other countries in Europe. The US might just manage to skirt a recession, but an upturn is at least a few months away.
Meanwhile, the US government and Wall Street joined hands to lead a global reordering of supply chains, including a $50 billion package to promote chipmaking in the US. The most headline-grabbing shift was by the world’s most valuable company, Apple, which began to move substantial parts of its gadget manufacturing from China to Vietnam and India.
Covid-19 and increasingly complicated economic relationships with other nations means China may not overtake the US as the world’s largest economy until 2036, six years later than earlier estimated. But India would become the third largest economy in 2032 and hit $10 trillion output in 2035.
The silver linings
Apple’s move and the government’s business-friendly policies have brought India back in the sights of global investors. Indian equities will end the year near their peak valuations amid a host of influential global investors rooting for its long-term potential. Morgan Stanley called this India’s decade. Jim O’Neill, chairman of Chatham House UK and former Goldman Sachs economist who coined the term BRIC, sees India as the most promising investment destination for the next five years. The World Bank now believes India will grow faster than anticipated in the year ending March 2023 but will be stymied by global headwinds in the following financial year, which will also see a series of crucial state elections.
For all the disruption, 2022 also gifted two scientific breakthroughs that could change humanity unimaginably.
1) US scientists at the Lawrence Livermore National Laboratory achieved net energy gain, potentially unlocking the secret to limitless clean energy. It is akin to replicating the sun on a miniature scale. Although the real-world application is still some years away, it holds out hope for a world of clean, abundant energy.
2) Chinese scientists from Shenzhen University and Sichuan University have invented an electrolyser that can produce hydrogen directly from seawater on a large scale. That will bring down the cost of fuel dramatically and enable a faster shift to hydrogen-powered vehicles. Crucially, it will also help save fresh water.
Limitless energy and freshwater; you couldn’t ask for anything more hopeful for humanity and earth, can you? Wish you a very Happy 2023!
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