The pandemic and the war in Ukraine have cut off all global trade routes. The closure of the largest commercial ports on the planet and the mess in air freight have disrupted trade between producing and consuming countries. This succession of crises has cast a harsh light on the extreme dependence of European countries on Asia and Russia. In a few years, all these shocks have shaken the model of “happy globalization”.
In this particularly chaotic context, globalization could change its face in the coming years. Several rich countries have announced their intention to relocate part of their production and large multinationals have announced their desire to set up industrial sites in Europe to secure their supply. This could have an impact on the cost of production in companies and the purchasing power of households.
Are we moving towards a more expensive world? It is still difficult at this stage to establish a precise medium-term price level, but some economists believe that life will be more expensive in the years to come. “The effects of the pandemic and the war in Ukraine will still be felt on inflation in 2022 and 2023. After 2024, we are convinced that we are heading towards a more expensive world. We have gone from a world where energy was cheap, to a world where energy is much more expensive. The energy transition will make energy prices much more expensive,” affirms the economist of ING, Charlotte de Montpellier, in charge of the follow-up of the euro zone questioned by The Tribune.
Globalization: towards a change of regime
Since the mid-1990s, the global economy has entered an era described by economists as “hyper-globalization”. This period, marked by the creation of the World Trade Organization (WTO) in 1995, saw an acceleration in trade, a drop in transport costs and the development of logistics chains all over the planet. Emerging economies, particularly in Asia, have acquired a considerable place in production and consumption processes in just a few years.
This excessive liberalization has increased the share of imported products in household consumption in the euro zone. A recent study of the Banque de France entitled, “Globalization and its impact on inflation”indicates that this share almost doubled between 2000 and 2016 in the euro zone, rising from 9 to 16% for products coming mainly from low-wage countries, but this “hyper-globalist” regime is increasingly questioned. by renowned economists such as Joseph Stiglitz in his book « The Great Disillusion” (2002) or Thomas Piketty. It seems that the serious financial crisis of 2008 marked a first breaking point in the trade openness of the world and the euro zone.
Source: Bank of France
To this financial crisis was added the trade war between the United States and China under the Trump administration. For four years, the two powers fought a particularly fierce battle on the trade front with customs barriers, taxes on imported products and other protectionist measures.
Finally, the two long years of the pandemic and the war in Ukraine have finally convinced many economists that globalization is moving towards regime change. This upheaval should have consequences that are still difficult to measure on the level of prices.
A peak of inflation to come
In the short term, the consumer price index could climb further to reach unprecedented levels. In the United States, inflation reached 9.1% year-on-year in June due to exorbitant prices at the pump and food prices. This unprecedented acceleration in 40 years pushes the Federal Reserve (Fed) even further to raise its interest rates to deal with this deleterious inflationary spiral.
The surge in prices across the Atlantic clearly threatens growth, usually driven by consumption, the traditional engine of the American economy. Politically, Joe Biden is in bad shape a few months before the midterm elections. The purchasing power of Americans has been constantly eroded by the rise in prices for several months.
In Europe, the outlook is bleak. In the 19 countries sharing the single currency, the European Commission downgraded its forecasts in mid-July and expects only 2.6% growth in gross domestic product (GDP) in 2022 and only 1.4% in 2023. , against 2.7% and 2.3% expected so far. Brussels at the same time raised its inflation forecast to 7.6% in 2022 and 4% in 2023, against 6.1% and 2.7% previously expected in the euro zone. The exposure of countries in Europe to the war in Ukraine is not the same according to the economic model of each State. But a cut in Russian gas in the coming months could plunge the economy of the Old Continent into a dizzying recession.
Towards higher costs for companies
Many sectors in France have recorded an increase in their costs in recent months due to the feverish surge in the prices of energy, raw materials and all the shocks in the supply chains. On this point, the manufacturing industry, which is highly dependent on foreign countries, has been particularly shaken for several years.
In France, even if the supply difficulties seem to be easing According to a recent survey by the Banque de France, factories will no doubt see their bills rise in the medium term.
« Before the pandemic, there was already an environment conducive to rising prices. The pandemic and the war in Ukraine have drastically accelerated this transition. This directly impacts companies that had built their model on inexpensive energy like in Germany. This inexpensive source of energy will no longer exist. This will lead to higher prices in the future,” explains Charlotte from Montpellier.
On the services side, costs could also rise, even if the tertiary sector is less exposed than industry to fluctuations in energy prices.
In addition, the succession of crises is forcing leaders to review their supply strategy in terms of energy or components to depend less on foreign countries. This change in strategy could automatically have repercussions on production costs even if companies secure their supply.
Towards an increase in the cost of living for households
From the point of view of households, the globalization of trade has long been promoted as a means of gaining purchasing power. In one study, Banque de France economists had shown that imports from low-wage countries exerted downward pressure on inflation by around 0.17 percentage point per year. The researchers had concluded that these imports represented a gain of around 1,000 euros per year. It should nevertheless be remembered that these imports, from low-cost countries, have had dramatic repercussions on industrial employment in many regions in France, notably through the effect of offshoring.
If the slowdown in trade on the planet can push the prices of certain goods upwards, the latest events (pandemic, war in Ukraine) have shown that trade openness could be an important factor in the transmission of price shocks in the most economies on the planet. Above all, the war in Ukraine has had an impact on food prices and in particular all wheat products.
In the short term, the rise in the cost of living for households will largely depend on the duration of the conflict at the gates of Europe. On this subject, certain specialists such as IFRI researcher and director of the Russia center, Tatiana Katsouéva-Jean, believe that ” the war will last. The Russian regime is capable of sacrificing part of its economy. » As a result, energy costs are expected to remain high for a long time to come.
In the longer term, the household budget should also be affected by the repercussions of climate change. More and more families will be forced to adapt. “The renovations will increase the need for raw materials. This will increase prices in general. The high demand for the necessary investments will impact household budgets,” explains Charlotte from Montpellier. One of the major challenges for States will be to limit the impact of all these increases on the purses of the most modest households through permanent measures. A challenge still far from being won.
