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War In Ukraine Will Negatively Impact Licensing Industry in 2022/23

By Gary Symons

TLL Editor in Chief

According to the IMF’s latest World Economic Outlook, the war in Ukraine will set back the global economic recovery, will create several months of high inflation, and may plunge much of the world into a recession. The war is also expected to further tangle up global logistics, and threatens to cause widespread hunger as food prices rise. 

Thanks, Putin.

The news is bad for everyone as the Russian invasion grinds into its third month, and poses a dire threat to the licensing and consumer products industries in particular. As prices rise, global GDP shrinks, and job growth slows, a recession is expected to decrease consumer demand for licensed products and services on a global basis. 

How bad the economy becomes will depend on how long the war lasts, whether Russia decides to withhold oil and gas from European nations, and how the NATO alliance and the European Union respond to the sudden energy crisis. 

In previous months, The Licensing Letter has gone through economic forecasts from the IMF, World Bank, and other organizations with predictions early this year that the licensing sectors impacted most by COVID-19 restrictions will now see rapid growth. For some sectors that may still be the case, as industries like theme parks, restaurants and travel saw their revenues plunge to historic lows during the pandemic, but are now returning to near normal.

However, a recession driven by a European war that threatens to go global would certainly see that recovery ramped down significantly. 

In report, we’re looking at the near and long-term forecast for the global economy, with the proviso that we also mentioned in our earlier articles that the situation is changing very quickly, and the impact on the economy will depend largely on how long the war lasts; whether the conflict escalates beyond the borders of Ukraine; and whether countries that have tacitly supported Russia (or at least turned their faces away from the conflict) are dragged into a potential cold war. 

This report will focus on the overall impact on global and regional GDP, and also on global trade and logistics. In our last economic report in early March, TLL focused on data from the EIU, but data from the IMF was not yet available. Due to the recent release of the IMF’s revised World Economic Outlook, we can now update the economic forecast compiled by the IMF over the past two months.

A Dark Global Economic Outlook

If you’re following the news, you’ll already know the world economy is in turmoil. Central banks are struggling to deal with rising inflation, particularly due to increasing food and oil prices, while at the same time trying to protect economic growth.

Unfortunately, the International Monetary Fund says those goals are threatened by the ongoing war in Ukraine, as well as the ongoing disruptions of the COVID-19 pandemic. The IMF also predicts the economy will see the worst of both worlds as the crisis threatens to tip the world into a state of ‘stagflation’, where inflation is combined with economic stagnation. 

“Even as the war reduces growth, it will add to inflation,” the IMF states in its most recent report. “Fuel and food prices have increased rapidly, with vulnerable populations—particularly in low-income countries—most affected. Elevated inflation will complicate the trade-offs central banks face between containing price pressures and safeguarding growth. 

“Interest rates are expected to rise as central banks tighten policy, exerting pressure on emerging market and developing economies. Moreover, many countries have limited fiscal policy space to cushion the impact of the war on their economies. The invasion has contributed to economic fragmentation as a significant number of countries sever commercial ties with Russia and risks derailing the post-pandemic recovery.”

The war in Ukraine is also creating the potential for much longer term disruptions of the global economy, that could even permanently alter or terminate the globalist economic structure the world has built up since the Second World War. 

TLL has reported in February and March about the potential for an economic cold war with countries like China and India that hold alliances with Russia despite that country’s invasion of Ukraine, and the growing evidence of widespread war crimes committed by the Russian army. The IMF shares this concern, saying in its most recent report, “The invasion has contributed to economic fragmentation as a significant number of countries sever commercial ties with Russia and risks derailing the post-pandemic recovery. It also threatens the rules-based frameworks that have facilitated greater global economic integration and helped lift millions out of poverty.”

China and many other countries in South and Southeast Asia have been prime beneficiaries of that rules-based global economy, as the shift of manufacturing to those nations has resulted in rapid economic growth throughout the region. 

Companies and the general public in the West have also benefitted from lower prices and a huge increase in the availability of high-quality, affordable consumer goods, delivered in an efficient fashion. 

But that model has been challenged by the pandemic, which has roiled supply chains globally, and is now threatened long-term by the political turmoil unfolding from Russian president Vladimir Putin’s decision to invade Ukraine.

Regional Impacts

The impact will also be felt differently in different regions. The IMF and virtually every other economic think tank all agree that Europe will be most affected by the war in Ukraine. GDP growth in Europe is now expected to plunge to just 2.8% this year after a relatively strong showing in 2021 of 5.3%. By contrast, the United States should see GDP growth of 3.7%, although both regions are expected to now perform poorly in 2023 with only 2.3% growth in GDP.

The war is having far less impact on Asia and the Middle East, however, since many countries have not imposed sanctions, and are not reliant on Russia for oil and gas. In the case of China, Russian oil and gas exports continue to flow, and the war has so far had much less effect than the ongoing problems with COVID-19 outbreaks (see below). As a result, growth in Asia is expected to remain relatively strong at 5.4% in 2022 and 5.6% in 2023, while the Middle East and Central Asia expect growth of 4.6% and 3.7% respectively.

The Continuing Impact of COVID-19

While the Ukraine conflict is by far the greatest driver of the current economic crisis, the IMF says those hoping the pandemic is done with us will be disappointed. 

“Although many parts of the world appear to be moving past the acute phase of the COVID-19 crisis, deaths remain high, especially among the unvaccinated,” the report points out. “Moreover, recent lockdowns in key manufacturing and trade hubs in China will likely compound supply disruptions elsewhere.”

Most recently China imposed severe lockdowns in the global production and finance hub of Shanghai. The city has been locked down for a month already as part of China’s “zero COVID” policy, leading to shipping delays, higher costs, and increasing bottlenecks in the global supply chain. Last week the port in Shanghai reported more than 500 container ships were anchored offshore, waiting for products to ship. 

Some ships are trying to avoid delays by heading to the nearby port of Ningbo, but in general the time ships are spending waiting for cargo is increasing, with those added costs being passed on to customers. For example, imported containers spent only 4.6 days waiting to be filled in Shanghai on March 28, but that increased to 14 days by April 23. 

Worse, the crisis in China is spreading, as the capital in Beijing saw COVID-19 spreading in the nation’s capital. Beijing is not one of China’s major production and shipping centres, but global markets see the development as an indication that lockdowns can and likely will spread to other major centres, such as Guangdong or Ningbo.

Global Growth Estimates Plunge

As a result of the multiple threats to the economy, the IMF has downgraded its estimates for global GDP growth in 2022/23. In its World Economic Outlook report, the IMF now says global growth will slow from 6.1% in 2021 to only 3.6% in both 2022 and 2023. 

This is a decrease from the forecast of 4.4% the IMF forecast for 2022 back in January, before the war began, and 0.2% lower for 2023.

This gloomy outlook is also expected to persist with the IMF predicting, “Global growth is fore- cast to decline to about 3.3 percent over the medium term.”

Employment and productivity for most countries, with some exceptions, are expected to remain lower than pre-pandemic levels, and inflation is expected to remain high for a longer period than originally anticipated. 

In 2022, the IMF is forecasting inflation averaging 5.7% in advanced economies like Europe, the US and Canada, and a crippling 8.7% in emerging markets or developing economies. These figures are 1.8% and 2.8% higher respectively than the estimates in the January World Economic Outlook. 

Things Could Get Much Worse, Says IMF

But these estimates also assume that the conflict remains confined within the borders of Ukraine and that oil and gas supplies from Russia are not cut off due to either sanctions against Russia, or alternatively, because Russia withholds energy shipments to the European Union. 

Unfortunately, there are already signs that both of those worst case scenarios could be happening. 

The breakaway republic of Moldova, which borders Ukraine, has raised its terror threat to the highest level after Russian officials threatened to expand the war into the Transnistria region of that country, followed by several mysterious explosions across the country that destroyed radio antennas. Moldova and NATO now fear Russia will also invade Moldova if it succeeds in defeating Ukraine.

Even more worrying, Russia has threatened military retaliation against Western countries for their support of Ukraine. Putin himself said the West wants to cut Russia up into different pieces and accused NATO of pushing Ukraine into conflict with Russia.

“If someone intends to intervene into the ongoing events (in Ukraine) from the outside and creates unacceptable strategic threats for us, then they should know that our response to those strikes will be swift, lightning fast,” Putin threatened. “We have all the tools for this—ones that no one can brag about. And we won’t brag. We will use them if needed. And I want everyone to know this. We have already taken all the decisions on this.”

Those kinds of statements caused the IMF to caution its economic outlook could actually be too rosy. 

“Unusually high uncertainty surrounds this forecast, and downside risks to the global outlook dominate—including from a possible worsening of the war, escalation of sanctions on Russia, a sharper-than-anticipated deceleration in China as a strict zero-COVID strategy is tested by Omicron, and a renewed flare-up of the pandemic should a new, more virulent virus strain emerge,” the authors warned. “Moreover, the war in Ukraine has increased the probability of wider social tensions because of higher food and energy prices, which would further weigh on the outlook.”

Good News For Services, Bad News For Consumer Goods

While the economic outlook is generally negative, companies in the licensing sector still need to know where growth is likely, and there are some segments of the global economy that are expected to pick up in 2022 and 2023. 

In general, consumer goods revenues remained surprisingly high during the pandemic, particularly for industries that supplied goods that people could use during the period of lockdowns and restrictions. For example, while restaurant revenue sagged, people bought more kitchen gadgets and ordered more food from companies like Skip the Dishes or Uber Eats. While gym memberships fell off a cliff, more people bought outdoor gear and exercise equipment. 

So, in general, consumer goods remained relatively strong, while in-person services like sporting events, gyms, restaurants, travel, movie theaters and so on saw huge decreases. 

Over the coming year or two, those figures are expected to reverse. The IMF is predicting that there will be a “rebalancing from goods towards services” as pandemic restrictions ease or end altogether. 

“Although service inflation started to recover in 2021, pre-pandemic spending patterns have not fully reset, and goods inflation has remained prominent in most countries,” the Global Economic Outlook states. “Provided the pandemic eases, services demand will pick up, and the overall consumption basket should return to pre-pandemic configurations.”

For that reason, the licensing industry is already seeing a significant upsurge in services related deals, something outlined by this year’s Licensing Expo focus on Experiential Licensing and Location-Based Entertainment. After two years of the pandemic, Licensing Expo organizer Anna Knight says people want to get back to normal life, and that means gathering in theme parks, movie theaters, restaurants and more. 

“With the shift to experiential marketing and society looking to be a part of something bigger as people step back into the world after lockdown, there is a burgeoning and unmissable opportunity for brands to tap into Location-Based Entertainment to engage with their audience on a deeper level which will be reflected through this year’s LBE theme,” said Knight.

As well, unlike consumer goods, services are not terribly dependent on global supply chains, and so the sector faces less headwind during the post-pandemic recovery.

See Below for Related Stories Prior to the War in Ukraine

2022: A Year of Recovery and Radical Change in the Licensing Industry

Twin Studies Predict Strong Recovery For Licensing and Retail

McKinsey Report Studies Changing Face of China’s Retail Market

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