By David Skilling*
Coming from New Zealand, I am unfortunately used to earthquakes. After the main quake, aftershocks (some very large) are common. And after the tectonic shock of the Russian invasion of Ukraine, there has been a rolling series of aftershocks as the global economic and political system reconfigures.
Big power wars (as with pandemics) put pressure on fault lines in countries and in the global system. My assessment is that the Russian invasion of Ukraine, and the Western-led response, represents a rupture in the global economic and political system. These tectonic changes will play out over long periods, but the speed and scale of the aftershocks are already striking.
The global economy is fragmenting along political lines. Events over the past week or so provide more indications of the characteristics of this emerging environment.
The West renewed?
The scale of the Western-led response (economic, military, political) to the Russian invasion of Ukraine has surprised relative to initial expectations. And there are some signs that economic and political relations between countries in the Western orbit are strengthening.
The Russian invasion has redrawn the strategic architecture across Europe: NATO has been reinvigorated, and there are commitments to increase military spending.
On Thursday, the Finnish President and Prime Minister recommended that Finland apply for NATO membership. This application has political support, and will happen – and will be approved by NATO. Sweden is likely to follow suit next week. Security guarantees have been provided to Finland and Sweden for the interim period until they become NATO members.
The EU is using economic instruments to extend its reach. The EU has offered tariff-free access for Ukraine, for example, and is looking to accelerate FTAs with Australia, New Zealand, and others. And this week President Macron suggested a looser grouping of European countries on the periphery of the EU that could receive some of the benefits of EU membership – a way of integrating with countries that may not achieve full membership.
In Asia, several countries implemented sanctions on Russia (including Singapore, Japan, and South Korea). And Japan has been expanding its intelligence sharing arrangements with ‘five eyes’ countries, most recently with New Zealand.
There are risks to Western coherence of course. The US is the dominant member of the West; it has been central to the military and economic support of Ukraine (legislating a total of over $50 billion in support so far). But it is not clear whether a future US Administration would be as committed to these alliances (refer my note last week). And there are differences in Europe on how to approach China; note the calls between President Xi, President Macron, and Chancellor Scholz last week.
Although it will be a bumpy process, tighter strategic relations across the West and ‘friend-shoring’ (per Janet Yellen) of economic relations look likely to expand.
Choosing not to choose
But this fragmentation of the global economy is not simply a binary split between the West and China/Russia. The UN voting patterns show that between the Western-led group of countries and China/Russia lies a large middle ground – from Asia (India, many ASEANs) to the Middle East, Africa, and Latin America - together accounting for over half of the world’s population. These countries are looking to avoid having to make choices between the West and China/Russia. Not everyone is ‘doomed to choose’.
This is where ongoing action is likely to persuade countries on their positioning. India, the largest of the non-aligned, has been invited to the German-hosted G7 meetings in June; and Mr Modi has recently been in Europe for meetings. The US is offering India more in terms of military relations, and India is engaged in the Quad grouping.
ASEAN leaders are in Washington for a US/ASEAN summit yesterday and today, hosted by President Biden. Most of the ASEANs abstained from the various UN resolutions on Russia (Singapore was an exception) and are reluctant to join any coalition aimed at China, their largest trading partner. But many value the security backstop provided by the US.
The problem is that the withdrawal of the US from the CPTPP has left the US without a credible economic agenda in Asia; and the Indo-Pacific Economic Framework currently being offered is a pale imitation. For the ASEANs, together with others in the region like Japan and South Korea, these economic considerations weigh heavily – and will limit the ability of the US to forge a strong, broad coalition in Asia. To understand geopolitics, it pays to follow the money.
And China, of course, is using its economic weight to strengthen economic and political relations with a broader group of countries. Figuring out the location of these political contours is central to understanding likely future patterns of global trade and investment flows.
The costs of fragmentation
A fragmented global economy is more costly and inefficient, due to additional frictions, disrupted global supply chains, and so on. Indeed, energy, food, and commodity prices remain highly elevated – contributing to the ongoing surge in inflation (refer chart of the week, below).
The economic shock plus the inflationary impulse is causing concerns about stagflation; central banks are raising interest rates into a weaker economic context. These stronger economic headwinds have been a catalyst for the equity market selloff.
A meaningful decoupling from China over time would be more costly again. Some decoupling is underway already, and more is inevitable as geopolitical tensions continue – although China’s scale and centrality means it cannot be sanctioned as completely as Russia.
At a national level, Russia has effectively cut itself off from the global economy with a new Iron Curtain. Russian economic data so far is better than initially expected: the currency and interest rates have stabilised on capital controls, and income from oil and gas exports is helping Russia’s economy.
But Russia’s GDP is forecast by the IMF to contract by ~9% this year (and likely by more), there was an outflow of 3.8 million people from Russia in Q1 (~2.5% of the population), its technology sector can’t function, and it has destroyed the major market for its gas exports. The Victory Day ceremonies in Russia this week – and Mr Putin’s speech – were muted for reasons beyond military failures.
And for Ukraine, the invasion plus the involuntary decoupling from the global economy is an economic catastrophe. GDP is forecast to contract by over a third this year, with a reconstruction bill currently estimated at €200bn-500bn, >3x Ukraine’s pre-war GDP. However, post-war, Ukraine is likely to benefit from moving into Europe’s economic orbit.
A new world
We are in the early days of a new global economic order emerging, but some of the characteristics are becoming clearer. The costs and disruptions of a more fragmented global economy are immediately evident.
Although I remain generally positive about the resilience of globalisation – it is changing shape rather than reversing – these global frictions will be challenging for (small) economies that are deeply exposed to global flows. Looking forward, global flows will be increasingly shaped by political factors (‘values-based globalisation’). These political fault lines in the global system are beginning to emerge.
There is much uncertainty. But it is clear that this will be a very different global economy than over the past few decades.
*David Skilling ((@dskilling) is director at economic advisory firm Landfall Strategy Group. The original is here. You can subscribe to receive David Skilling’s notes by email here.
59 Comments
I think we (NZ) sometimes forget or don't realise how extremely vulnerable we are to global forces. We haven't really needed to for a long time as things have been pretty tickety boo, China can't get enough of our produce, everyone wanted to come to NZ and/or buy property in NZ, we knocked Covid on the head early on, had ultra cheap borrowing allowing us to splurge on all the things we ever wanted etc.
I remember questioning as to the sustainability of such a situation and many would just say, "nothing will ever change as it would take a major global event to have any negative effect". And now look at us!
.. people gotta eat ... we're hungry critters , and that's NZ's backstop , we produce enough to feed 40 million , 8 times our own population ...
Which makes me theorise that our greatest threat is actually from within ... from an ideologically driven government whose cackhanded efforts to reshape our nation are placing onerous & unnecessary burdens on those involved in the primary produce industry...
we produce enough to feed 40 million , 8 times our own population ...
Yes. But the emphasis in NZ is for 'value added' produce. It works well if you can target and connect with the high-income consumers in export markets. But it's a competitive market too. Brands like Ireland's Avonmore has done a much better job at securing mkt share in the Middle East than any brand from NZ.
Oh well. We have political parties that live in a fantasy fairy land, so ultimately the 40 million to be fed will live onshore, rather than offshore. In a stunning turn around however, it'll be the feed that's sourced offshore.
The Victory Day ceremonies in Russia this week – and Mr Putin’s speech – were muted for reasons beyond military failures.
They seem to keep their spirits up by threatening to launch nuclear weapons against several countries per week.
India isn't really committed to non-alignment, if we play hard-ball with them there is no way they'll choose Russia over doing business with the OECD. Russia does offer better kickbacks but that's about their only advantage.
Agreed Squishy threatening to launch nukes is becoming Russias constant answer sounding a bit like the boy who called wolf but one day the wolf may come. The fracturing of global fault lines will sooner or later affect our trade and we are very exposed with our reliance on China. Russia has made itself a pariah state and will still sell product but will be a price taker as will have limited generally poorer markets . This fracturing will also have repercussions in dealing with global warming.
He doesn't need to feel like he has achieved victory, he knows he's already failed. He needs an option that lets him sell the outcome to Russians.
Ukraine agrees to enshrine de-nazification (whatever that means) into their constitution so he can claim he achieved that objective. NATO and Russian agreeing to jointly monitor this alongside someone neutral like India (let's him portray NATO and Russia as equals).
Ukraine agrees not to join NATO (but receives security guarantees from members). Another "victory".
Rather than reparations, Russia agrees to support Ukraine with their rebuild now that the "objectives" have been achieved.
I don't see how the Donbas and Crimea occupation plays out though.
Won't work, unfortunately a ceasefire or negotiated peace would just result in Russia regrouping for another continuation war later. I think the Ukrainians realise that they must actually decisively defeat Russia to end their Imperial ambitions and that means full military rollback.
Putin just has to see it through to the next northern winter (November) when the bulk of Europeans will have to face the painful reality of serious natural gas and wheat shortages, both of which are traditionally sourced from Russia and, for wheat, the Ukraine. Already the Europeans at the current G7 Summit are complaining that the Russians are waging a "wheat war" on them but how do they seriously equate strict sanctions being applied on Russia whilst at the same time still expect essential Russian commodities to come their way? Whether we like it or not, Russia still has a few cards up it's sleeve (time permitting) without resorting to the nuclear option, which itself would only be an option if the corner they get backed into becomes just too tight.
Putin played his cards well. He obviously realises energy is the master resource. I guess what he didn't bank on, is the delusional thinking in the west that relegates energy to just another commodity. The little tsar's imperial ambitions better be thwarted by next winter, otherwise things will really get interesting. It's just a matter of how much global energy demand is destroyed, or how prepared western leaders are to go cap in hand to the Kremlin mafioso? Either way, the exponential growth era is done!
"we are very exposed with our reliance on China"
Just a day or two ago the headlines shouted that the USA is in crisis with a shortage of milk powder infant formula. Now, wouldn't this be on the face of it a marvellous opportunity to diversify our dairy exports into the USA. However, no further comment from the Government or Fonterra or the dairy industry! What is going on here? Let me speculate: the USA dairy lobby would stymie any attempt to import such produce and the USA politicians would back off. Inotherwords, the USA wants NZ to onside when it comes to ideology, security, and military relations but will not budge one inch economically....we are only fair weather friends as far as the USA is concerned.
Perhaps Keith Woodford could comment on this...it would appear to come within his level of expertise. Or could it be that for whatever reason journalists have failed to address this issue?
Your right is was barely a whisper- over 20 years of American Manufacturing being financialized and no party there to speak for the industrial middle classes, as Free Trade was the mantra of both parties, until a party was hijacked and a leader came out of nowhere to sound the alarm and mobilize the blue colour class thrown away by the new Democrats. It only took nearly 25 years to awaken the masses but the genie is out of the bottle now. Those Red States are not done yet and I expect they will be seizing back more control.
But Russia’s GDP is forecast by the IMF to contract by ~9% this year (and likely by more), there was an outflow of 3.8 million people from Russia in Q1 (~2.5% of the population), its technology sector can’t function, and it has destroyed the major market for its gas exports.
Be careful not to miss the global instability that is caused when central banks print money to keep their economies afloat - or in the case of the world power, print money to fund the deficits that it creates to protect its dominant position (eg defence spending it can’t afford via normal taxation).
Not Orrs fault, but it’s correlated to what the Fed has been doing and that is part of what causes the instability.
Be careful not to miss the global instability that is caused when central banks print money to keep their economies afloat - or in the case of the world power, print money to fund the deficits that it creates to protect its dominant position (eg defence spending it can’t afford via normal taxation).
Exactly. Central banks have been integral to maintaining power structure between countries while at the same time duping and robbing the people in both developed and developing countries.
"India, the largest of the non-aligned, has been invited to the German-hosted G7 meetings in June; and Mr Modi has recently been in Europe for meetings. The US is offering India more in terms of military relations, and India is engaged in the Quad grouping."
Modi will be ducking and diving to have a bob each way. Hand out to the US wrt China while still getting cheap oil from Russia.
Too much in the hands of too few. No way should any one man have the wealth the likes of Musk, Bezos and Zuckerberg have. It's rotted every one of their souls.
How a revolution can be mounted against the terrible inequalities that neo-liberalism has caused I don't know. How the hell do you storm a Cayman Islands bank account?
Agreed but it is only a result of the capitalist path that we chose. Unfortunately one of the major side effects, and one that we are seeing more and more of in NZ, is narcissistic behaviour. Not uncommon to hear kids answering “I just want to be rich” when asked what they want to do in life, to me that is frightening. A generation ago it was nurses, doctors and fire fighters. A massive culture shift in the wrong direction.
This is why Bitcoin will never be the utopian system it's advocates imagine it to be. International cooperation could (hard but possible) address the Cayman Island issue. With a decentralised system like Bitcoin that would never even be conceivable. Remember most of the Bitcoin "wealth" has already been issued to who know who?
Will airlines be a thing in 10 years?
Pretty sure none of them asked for governments to pump up asset prices, inflating their net worth. It mostly came out of thin air.
Billionaires are a distraction. It’s the upper/upper middle classes that are the problem: the rent seekers enriching themselves at the expense of the lower classes, by blocking growth and taking handouts from the government (the opposite of neoliberalism). At least Musk and Bezos built something valuable.
Firstly, We should be aiming to reverse this diplomatic breakdown with Russia and aiming to turn Russia to our side using diplomacy. They are our European brothers after all and their territorial disputes over what is their natural sphere of influence should not be used to blow up our own economies with unbearable commodity prices. It should be a top diplomatic angle to turn Russia to our side in the coming cold war with China.
Secondly, the economic headwinds we face are entirely because we outsourced everything for cheap labour under these neoliberal ideas of free market competition and profiteering. The victory in the Second World War depended on the ability to manufacture in far greater quantities than the Axis could by any measure and it is what true economic power is. All this bluster about financial power is pure lies and garbage from the money changers who hand out loans so we can sell each other coffees and call that GDP.
We need to build a new generation of capitalist industrialists, backed by tariffs to protect infant industries in key areas, to establish our own shipping firms (these should be SOEs) to secure logistics chains and come to realise that we got the lowest price by ignoring all the risks of outsourcing, deindustrialising and deskilling.
Imagine if we had to pay for locally produced goods using living domestic wages as the inputs! The prices would be unreal and the level of inflation…wouldn’t be acceptable to people who want to keep the OCR at zero so that asset prices never fall!
I agree in principle with what you are saying.
Living through a depression gave the greatest generation a different view of the world compared to the other generations after them.
One home was enough, grow their own vegetables, no need to speculate on houses or share market returns, work hard to ensure social stability by setting the example of what it means to be a good citizen….unite people together, not divide them for personal political or financial gain. What we are witnessing at present is the opposite of that.
I agree too IO. But my experience with commercial business's is that they charge what they think the market will bear, not what a product cost to manufacture plus a percentage. Greed had taken over market principles. A lot of items wouldn't be nearly so expensive for us if they went back to those principles.
Current economic models are too much around neo-liberal models, but the Government could chuck them out and change the way it taxes to build a functioning economy again. It could benefit everyone.
"The global economy is fragmenting ...."
Our world is changing. After the world wars in the 20th century, major wars did not occur. Disagreements and fights happen, and for a time, UN peacekeepers was able to do their work.
Come the 21st century, the Saudis invaded Yemen, with legal paperwork from the UN. Russia annexed Crimea.
ISIS crushed in Iraq and Syria. Syria was turned into a target practice ground.
Today, the West have made a judgement on Russia, that an invasion on a fellow european nation is a no no. But not China or India, nor Africa and many nations of the world.
Our economy is a baby of alliances. No trade with enemies who want your land and enslave your people.
Global economy and supply chains are but a reflection of friendship and enmity. Water splashes when rocked, it finds a level when the rocking stops.
You don't hear too much talk these days of Australia and New Zealand being "Asian" countries.
We are very much part of the Western sphere and it's good to see that this idea is being reinvigorated. About twenty per cent of the world is awesome and the other eighty percent is mostly miserable. We want to stay in that twenty percent.
I would be very reluctant to get too close to India. Why can't they sort out their phone scam industry? they need to knock that sort of thing on the head well before they can be regarded as a good place to do business by the Western nations.
Not really. Almost everything you see around you is Western.
There was an attempt to integrate things culturally but it has largely been an abject failure. Most people want to live modern lives and that is synonymous with Western lifestyle.
None of us really want to pursue a Chinese, Russian, Indian, Nigerian, Turkish even Japanese way of doing things surely? We are building upon and improving Western institutions, ideals and teachings.
Try not to misinterpret me. I'm fundamentally referring to a way of doing things and how we treat individuals.
This is true. While we try to add a veneer of Māori to our existence the rest of the world is using English the way we used to use Latin - showing off. Watch almost any Asian, Indian, French or Turkish drama.
I know PNG - it has been independent for a couple of generations and all its aspirations are to get out of the village and into the city; fishing is now a leisure activity instead of subsistence and probably most fish eaten come from tins. I've adapted a few PNG customs where I think they know better than the west but they have adopted writing, purchased clothing, a legal system, ceramic plates, education, electricity, mobile phones in other words cultural artifacts that are used every day by everyone whereas the most obvious cultural adaption in the other direction will be my funeral.
Anglosphere. Defined as speaking English as the primary language then among the top ten are Liberia, Jamaica, Trinidad & Guyana. Large numbers of English ancestors would be a better description - that includes South Africa. I think I have more in common with Denmark, Sweden, the Netherlands, etc.
Top 10 English-Speaking Countries in the World (as primary or lingua franca 2021)
- India — 1,393,409,038
- United States — 332,915,073
- Pakistan — 225,199,937
- Nigeria — 211,400,708
- Philippines — 111,046,913
- United Kingdom — 68,207,116
- Tanzania — 61,498,437
- South Africa — 60,041,994
- Kenya — 54,985,698
- Canada — 38,067,903
NZ should make more effort to export to India, Pakistan, Philippines
Anglosphere: The countries where English is the main native language, considered collectively.
https://en.m.wikipedia.org/wiki/Anglosphere
The reshaping of geo-political alliances is an ongoing thing. It is never quite the same today as it was yesterday. That's life. The reality that both drives & follows this continuum inside our own culture has been messed with constantly over the past 50 years by the enlightened ones & their politico-elite. The real danger we face today is the socialists & communists within our own societies, now ruling North America, NZ, Western Europe & other key western allies. The only way to show up these traitors it seems, is by the big bad world (the 80% posted above) doing what Putin is doing & shaking the new reality (war & the why) in front of our faces. In that sense Putin has done us a favour. The looney realities of our leftist leaders is only over-ruled when the dangers of the rest of the planet realities confront us.
This also highlights what our mainstream medias do not tell us every day & that is how good we have things here when compared to the really bad countries. Which is most of them.
They tell we're to blame, & that we should feel guilty for what we've done & that equity of outcome is essential for us to balance our own culture. What crap. It took the best part of 1,000 years to get a culture this good & you want to tell us we f........ it up. They are so full of lies & s.... & they are trying to destroy what we've worked bloody hard for. Billy Connolly had a good suggestion for these type of people. "Tell them to f.... off!
"The real danger we face today is the socialists & communists within our own societies, now ruling North America, NZ, Western Europe & other key western allies. The only way to show up these traitors"
Had to try hard not to cough up my tea as this made me laugh so much. Socialists and communists ruling us, traitors no less. Let me guess, what we need is a powerful strongman who can use common sense to sort out these snowflakes and get us back on track, a nice middle aged rich white guy, we could all wear some sort of uniform (perhaps black shirts) to show we support him and go around with clubs dishing out a whole bunch of punishment to these traitors. Nice one John, you're not wrong.
I think John’s ended up on the Don Brash emailing list.
Weekly emails fear mongering that the Hau Haus are going to raid Victoria Avenue.
Not much more than racist rubbish.
The real traitors were the hierarchy of the National party who stood back for twenty years and let us close a lot of our manufacturing ,give half the seats of of our universities to overseas students & turn our economy into a giant Ponzi scheme.
The countries children can’t afford housing John… and now many won’t be able to afford food.
And quite frankly you should be a little scared because very little has been invested to generate a higher standard of living for the country… and pay the costs that are coming at us.
When the housing game goes pop there a going to be some very sad stories.
I suspect many will lose their pensions when New Zealand gets forced to cut its cloth.
Good luck living off your Fletcher dividends John!
The real danger we face today is the socialists & communists within our own societies, now ruling North America, NZ, Western Europe & other key western allies
You're hilarious! :) Reds under the bed!
Can you tell me when western rulers have advocated taking back the means of production and abolishing profit and money? Must have missed that...
The socialists within our own societies, now ruling North America, NZ, Western Europe & other key Western allies are integral to why these societies are so pleasant and free. The lack of socialism is what makes the US not quite as great as the Nordic or Australasian countries.
Instead of building empires by expanding modern advanced societies seek to increase freedom and improve wellbeing for all citizens. Everyone can have their own "empires of the mind". That we can have someone like Ardern freely elected as our Prime minister is a sign of success. We have also made great progress with including all members of our society in this endeavour.
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