Energy struggle. -Reasons. Russia, one of the most important sources of energy exports, is currently under sanctions due to the war in Ukraine. To influence Russia’s income as much as possible, Western countries have imposed sanctions on Russian gas and oil.
However, Russia was still pumping its gas to Europe in significantly reduced quantities via the Nord Stream 1 pipeline. Europe then asked its citizens to reduce consumption to replenish their stockpiles, but several times Russia has completely stopped the gas pump for “maintenance” in response to new sanctions announced, or after a leak in two of its Nord Stream pipelines due to Sabotage.
The world was not ready to alleviate such a shortage of energy sources, so a significantly reduced supply caused prices to rise.
-Results
In the short term, turning off the thermostat isn’t just about cost savings for many of Europe’s industrial companies as they prepare for a harsh winter. “Rising energy prices are currently causing an alarming decline in the competitiveness of Europe’s industrial energy consumers,” the European Industry Roundtable said in a letter to the president of the European Commission and the president of the European Council. For energy-intensive companies, “the damage will be irreparable” if immediate action is not taken to limit prices.
Even before winter begins, there is evidence that large companies are reducing production in some sectors due to energy shortages. And managers from chemicals to fertilizers to ceramics businesses warn that they risk losing their permanent market share and may have to move on some.
“We risk a massive deindustrialization of the European continent,” says Belgian prime minister Alexander De Croo.
Distribution of EU gas demand, market share, 2019 (%)… Source: Financial Times, Rhodium Group, Eurostat
In the medium and long term, it will greatly accelerate the EU’s green agenda, help the bloc’s transition to more solar, wind and nuclear power use, and also become independent of Russia, OPEC or other fossil fuel producers.
Climate change
-Reasons
-Burning coal, oil and gas produces carbon dioxide and nitrous oxide.
-Deforestation (deforestation). Trees help regulate the climate by absorbing CO2 from the atmosphere. When they are cut, this beneficial effect is lost and the carbon stored in the trees is released into the atmosphere, adding to the greenhouse effect.
-Increasing livestock. Cows and sheep produce large amounts of methane when digesting their food.
-Nitrogen-containing fertilizers produce nitrogen oxide emissions.
-Fluorinated gases are emitted from equipment and products that use these gases. Such emissions have a very strong warming effect, up to 23,000 times greater than CO2.
This adds enormous amounts of greenhouse gases to those that occur naturally in the atmosphere, increasing the greenhouse effect and global warming.
-Results
More frequent and intense droughts, storms, heat waves, rising sea levels, melting glaciers and warming oceans can directly harm animals, destroy their habitats and damage people’s livelihoods and communities.
As climate change worsens, dangerous weather events become more frequent or severe. People in cities and towns across the United States face consequences, from heat waves and wildfires to coastal storms and flooding.
As we have seen before with the impact of Hurricane Ian or the extreme droughts we experienced globally this year, climate change is affecting not only the aesthetics of our environment, but most importantly, our food production.
Among the consequences of sea level rise, we are faced with the fact that many cities built at sea level, such as Amsterdam, Miami and others, will be completely submerged and uninhabitable in a few years, perhaps even decades.
Decreased productivity
Recent trends in labor productivity, annual percent (5-year moving average)… Source: Bergeaud, 2016
-Reasons
It is estimated that a decrease in physical capital investment (capital deepening) (eg new machinery, factories) accounted for 44% of the decrease. The decline in capital investment is split into two parts: increased credit frictions and the fall in demand for new investment caused by the financial crisis; and a secular decline in investment caused primarily by a shift to investment in intangible capital (e.g., research and development (R&D), software, advertising, market research) that is more difficult to accumulate.
Intangible capital investments such as investment in new ideas, new production processes, advertising and new management techniques have spillover effects as they are difficult to maintain and can be imitated by other firms. This reduction in intangible capital investment reduces productivity-enhancing spillovers, which is estimated to account for another 17% of the decline in labor productivity.
International trade increases efficiency through various channels. Increases competition and therefore the drive to innovate; helps eliminate inefficient firms so resources can flow to more productive ones; and helps spread productivity-enhancing ideas around the world. The decline in international trade since the financial crisis is estimated to account for 9% of the productivity decline.
Allocative efficiency is the next factor in the table. This effect is driven by fewer new job creations, more zombie firms (large old firms, often protected by government regulations or subsidies), and less competition between firms. In economies with less competition, labor and capital are more likely not to be put to their highest value uses. As a result, workers will not be as productive as they could be. The authors estimate that less allocative efficiency contributed to 24% of the reduction in labor productivity.
A new factor has come into play since Covid. The “remote work” factor. Working from home has a significant impact on productivity, and one is more easily distracted by working in an area of familiar leisure and pleasure.
-Results
When employees are less productive, they either do less work in more time or spend more hours completing work. This increases operating costs. As a result, it takes more labor to produce the same output, which reduces profitability.
Efficiency essentially means doing more in less time. In cases where it falls, the delivery dates of the project that does not satisfy the customers will be missed.
When productivity drops, it affects team morale and engagement. Managers will begin to notice a decline in initiatives taken by their employees. Also, employees will be least interested in solving project problems. This can eventually lead to them leaving the organization.
An outside influence is imperative when employees are not productive. However, if their managers are also reacting negatively, it will make the work environment toxic. A study from SHRM reveals that about one-fifth of employees have quit their job in the past 5 years. This was because of a toxic work culture.
On a macroeconomic scale, all of the above will lead to slower GDP growth, reduced international trade, and a potential decline in international relations.
Population growth
-Reasons
The primary (and perhaps most obvious) cause of population growth is the imbalance between births and deaths. According to the World Health Organization (WHO), the infant mortality rate declined globally from 8.8 million in 1990 to 4.1 million infant deaths in 2017. At the same time, life expectancy is increasing all over the world.
According to the UN Population Division, the global fertility rate has dropped from an average of 5 children per woman in 1950 to 2.4 children per woman today. With this promising trend, contraceptive use has increased slowly but steadily globally, from 54% in 1990 to 57.4% in 2015.
-Results
It is logical that an increase in world population would place additional pressures on resources. More people means increased demand for food, water, housing, energy, healthcare, transportation and more. And all this consumption contributes to ecological degradation, increased conflict and increased risk of large-scale disasters such as pandemics.
An increase in population will inevitably create pressures that lead to further deforestation, reduced biodiversity, and increases in pollution and emissions that will exacerbate climate change.
Famine caused by environmental degradation and overpopulation has the potential to trigger an increase in violence and political unrest.
Ukrainian war
-Reasons
Putin told the Russian people that he was conducting a “special military operation” to “denazify” Ukraine and prevent NATO from expanding on Russia’s borders. But given how seriously he miscalculated, we should ask what he really thinks. We know from Putin’s own writings and from various biographies such as Philip Short that the intermediate reason is the refusal to see Ukraine as a legitimate state.
Putin lamented the disintegration of the Soviet Union, where he served as a KGB officer, and viewed Ukraine as a false state because of Ukraine and Russia’s close cultural proximity. Moreover, Ukraine was ungrateful, offending Russia with the 2014 Maidan uprising that overthrew a pro-Russian government and deepening its trade relations with the European Union.
Putin wants to restore what he calls the “Russian world” and is considering his legacy now that he is over 70. Earlier leaders such as Peter the Great had expanded Russian power in their own time. Given the weakness of Western sanctions after Russia’s invasion of Ukraine and annexation of the Crimean peninsula in 2014, Putin seems to have asked himself: Why don’t you go further?
-Results
Millions of civilians cannot return home. Many people still in the country are forced to live without access to food, water, sanitation, electricity and other basic necessities.
Ukraine has historically been a major grain exporter. In 2021, Ukrainian grain fed 400 million people worldwide. During the first 5 months of the war, Ukraine was unable to export grain from the main shipping routes via the Black Sea.
Blocking Ukraine’s grain exports has worsened hunger in some of the world’s most vulnerable areas. The situation remains dire, even as international efforts help to restart grain shipments. In East Africa, for example, a perfect storm of economic fallout from ongoing drought, blockade, and war is causing mass starvation.
The global repercussions of the war had disastrous effects on countries already facing conflicts and crises.
See the energy challenge section for energy results.
Stagflation and food prices
-Reasons
What causes stagflation? Source: Insider
Stagflation occurs when inflation coexists with slow economic growth and high unemployment. Typically, these economic conditions do not occur together. Unemployment and inflation tend to be inversely proportional. Thus, as unemployment rates rise, inflation usually falls and vice versa.
Stagflation is the perfect storm of economic ills: slow economic growth, high unemployment and high prices. The two main causes on which stagflation economists generally agree are supply shocks and fiscal and monetary policies.
A supply shock is anything that reduces the economy’s capacity to produce goods and services at certain prices. For example, there have been supply shocks during the pandemic in:
-Labor force employing fewer people
-Goods, eg semiconductor shortages that began before the pandemic
-Services as people delay elective surgeries and other healthcare procedures
Bad fiscal and monetary decisions also lead to stagflation. “Many things contribute to stagflation, but excessive growth in the money supply is the most important,” says Richard J. DeKaser, vice president and chief corporate economist at Wells Fargo & Co.
-Results
The trio of slow growth, high unemployment and rapid inflation puts a significant pressure on the economy.
“Stagflation is clearly harmful to the economy, as high inflation and inflation uncertainty distort investment decisions,” says DeKaser. “It also hurts fixed income markets, as rising interest rates push bond prices down and suppress equity valuations.”
For households, stagflation means making less money as people spend more on everything from food and medicine to housing and consumer goods. As consumer spending slows, corporate income falls, exacerbating the overall impact on the economy.
Conclusion? The outlook for this report is not so good:
-Severe climate change causing extreme droughts, hurricanes, rising sea levels…
-Ukraine war affecting global energy prices and debt as well as grains and fertilizers…
-Population growth likely to slow as the global outlook is not looking good…
-A global recession may be on the horizon due to the strong rise in energy prices, decline in productivity, high inflation and unexpectedly high employment…
It seems to us that we are on the verge of a new world catastrophe that has never happened before. It can take many forms. Possibly an increasing world-wide hunger or death, leading to famine and death in the poorest countries. Or mass migration that will lead to a complete restructuring of the world as we know it, due to rising sea levels, extreme temperatures, and the increased risks of living in hurricane zones.
What is certain is that the outlook is very moody.
Kaynak: Tera Yatırım-Enver Erkan
