By Gary Symons
TLL Editor in Chief
What a difference a couple of months can make.
In January The Licensing Letter was forecasting rapid growth in the global economy, with a major recovery for many sectors in the licensing industry.
TLL was pegging growth expectations at between 3.9 to 4.9% in 2022, as pandemic restrictions lifted around the world. TLL did list a number of factors that could dampen that growth, among them being a conflict between China and the US.
As it turned out, it was war in the Ukraine that has greatly changed the outlook for the world economy, which will negatively impact licensing programs involving consumer goods.
The Licensing Letter is still assessing the overall impact of the Ukraine invasion on the world economy, but already it’s clear that global growth will be greatly reduced, and in particular, the licensing and consumer product sectors will be hard hit by increased bottlenecks in the global supply chain.
As well, there is the disturbing prospect of more tension between China and Western nations, particularly with the United States, should China back Russia’s cause in attacking the Ukraine.
The Global Picture
Russia’s most recent attack on its neighbor to the west started on Feb. 24, after a massive buildup of troops around the Ukraine border, a naval presence in the Black Sea, and more troops stationed in Belarus.
The attack has been stalled by the fierce resistance of Ukraine forces, but the brutality of the attack itself compelled many nations to impose unparalleled sanctions against Russia, which is the third largest oil supplier in the world. As well, Ukraine is a major exporter of grain, so commodity prices for wheat and oil have soared, inflation is on the rise, and most stocks have fallen sharply.
The war is also increasing the already overloaded global supply chain, further increasing both prices and uncertainty for global consumer products companies. Both the Economist Intelligence Unit (EIU) and the International Monetary Fund (IMF) say the impact of the war will be felt globally, and will sharply reduce economic activity.
As a result, the EIU is dropping its growth forecast for Europe by almost half, down to just 2% growth in GDP compared to its previous projection of 4%.
Looking globally, the EIU expects global GDP growth to drop to 3.4% from their original projection of 3.9% in January.
The IMF has not yet released its revised expectations as of this writing, but said the impacts will be severe and widely felt. “While the situation remains highly fluid and the outlook is subject to extraordinary uncertainty, the economic consequences are already very serious,” the IMF said in a statement. “The ongoing war and associated sanctions will also have a severe impact on the global economy.”
The main drivers of the economic downturn are related to soaring commodity prices, to uncertainty driving down stock markets, to the various bottlenecks in the global supply chain, and finally to that combination of factors creating higher inflation.
Commodity Prices
The EIU says oil prices will remain above $100 US a barrel for as long as the war continues in Ukraine, exacerbated by potential new sanctions on Russian oil exports. As a result, gas prices will rise by at least 50% this year, on top of a 500% rise last year.
Base metals will also see huge increases, as Russia is a major exporter of many different metals, which will affect manufacturing and particularly the auto sector.
Ukraine and Russia together account for 25% of the global wheat supply, which will create a shortage of grains for breads, pastas, and other similar products.
Global Logistics
Financial sanctions and no fly zones will have an impact on supply chains and trade in general, although these are primarily limited to Russia, Ukraine and surrounding regions.
Sea freight lanes are being disrupted through the Black Sea; airliners and cargo planes from Russia have been banned throughout Europe and many countries around the world; and land-based trade routes will be shut down, creating bottlenecks just for Russia, but for products being shipped between Asia and Europe.
Global Inflation
This cascade of factors is expected to fuel inflation of more than 6% globally, with some areas much harder hit. Worse, the increased inflation will likely offset the positive impact of higher commodity prices for producers, so even mining companies, food producers and oil producers will not necessarily see much of an improvement in their bottom line.
For everyone else, though, the impact is much worse, as every type of manufactured product could not only be more expensive, but also face potential lengthy delays in shipping. The Just In Time system of global logistics is now shifting to a period of Always Late.
The China Question
While the war is throwing a wet blanket over the entire global economy, some analysts are concerned that an even greater threat could emerge if China continues to tacitly support Russia during the Ukraine conflict.
China has taken pains to appear as neutral as possible, despite its declared alliance with Russia. However, the country has forbidden criticism of the Russian war in Ukraine, has refused to join in on the global wave of sanctions, and continues to provide a source of export revenue for Russian oil, gas, grains, and many other products.
China also abstained from the vote in the UN to condemn Russia’s invasion, raising the ire of Western governments.
The country’s trade war with the United States has already caused some companies to move their manufacturing from China, and continued support for its troubled ally could cause a much more serious rift in relations between China and the West.
However, there are signs that there are limits to China’s willingness to support its troubled ally as a China-led development bank, The Asian Infrastructure Investment Bank, has suspended all its business with Russia and Belarus, due to “the evolving economic and financial situation.”
The AIIB further said, “Under these circumstances, and in the best interests of the Bank, Management has decided that all activities relating to Russia and Belarus are on hold and under review.”
That may indicate the political and economic price China would pay for supporting Russia has been found to be too high, and that the Chinese government wants to continue a business as usual approach with its Western clients.