This Week in The Lens

The Lens is FrontierView’s weekly newsletter published by our Global Economics and Scenarios team. Each week, The Lens features easily digestible content that dives into the business implications of macroeconomics on the market today.

Economic and geopolitical trends and insights from FrontierView’s Global Economics and Research team

For the last year, a seemingly relentless global shortage of semiconductors hobbled production of everything from cars to computers to healthcare devices to ICT, and provoked all sorts of handwringing over supply chain resilience. Now, we’re blessed with the opposite problem: an apparent glut – particularly in advanced chips used in consumer electronics. That’s great news for manufacturers reliant on semiconductor inputs (and painful for tech companies that invested massively in chip production), who now have one less supply chain headache to worry about. But there’s a catch: we’re swimming in chips primarily because consumers aren’t buying as much of the electronics they go into – not because of a healthy expansion in capacity.

There’s a similar theme playing out in other areas.  Shipping costs are down  – especially in and around the Pacific. Big box retailers are struggling to  unwind excess inventories . Manufacturers’  input cost and selling price inflation  are starting to ease. And in all cases, the reason pressures are easing is weakening demand – driven in large part by high inflation, squeezed profits and falling real incomes.

Does this mean we’re headed for a return to cheap inputs across the board? Not so fast. As FrontierView CEO Rich Leggett and I talked about in this month’s episode of  GlobalView, there’s likely a floor under a lot of the recent drop in  commodity and input prices . Production and capacity remain weak due to longer-term underinvestment and fears of a demand slowdown. Europe is entering a  severe energy crisis  that will spill into higher energy and goods prices around the world. Add that to geopolitical tensions, resource nationalism and other threats to global supply chains, and it’s difficult to see an easy return to pre-pandemic low-cost abundance even if we are headed for a global recession. 

Elizabeth Rust
Senior Analyst in Research 

Yesterday the United States posted another  inflation print  that showed on net, prices didn’t rise at all from June to July. After months of historic gains which brought headline inflation above 9% YOY in June, the release has ignited another round of debate about whether all these post-pandemic price pressures might be “transitory” after all. The report is good news and probably marks the beginning of a disinflationary trend. But look into the details and as always, there are caveats. Taking out the big drop in gasoline and other energy prices, price increases were still large. So-called “core” inflation eased, but that had a lot to do with drops in volatile airfare and car rental prices. Wage pressures remain very strong. All told, this report won’t be enough to blow the Fed off its  aggressive tightening pace .

The same ambiguities apply to the global inflation picture. Oil prices have dropped almost 20% in the last two months.  Global food prices  just posted their largest one-month drop since 2008. Prices for base metals are below where they were on the eve of the Russian invasion. That will almost certainly ease price pressures around the world. 

But will it last? The inflation of the last several months was unprecedented, but input costs remain uncomfortably high. The recent  dollar surge  has yet to filter into consumer prices outside the US. A lot of the drop in commodity prices can be chalked up to demand destruction caused by high prices – as prices ease, expect to see demand come back online. Throw  geopolitical tensions  and the likelihood of more  war-related supply disruption  into the mix, and it seems more than fair to expect “higher for longer” inflation even if the shock-and-awe inflation of H1 2022 is now behind us. All these cross-currents underscore the continued importance of keeping  cost management  and pricing decisions at the top of your strategy planning agenda.

Elizabeth Rust
Senior Analyst in Research 

As if the  Russia-Ukraine war  weren’t already casting a pall over the international business environment, Nancy Pelosi and her  controversial visit to Taiwan  this week are here to remind us of the centrality of geopolitics – and geopolitical risk – to multinational operations. That fact is a consistent theme of FrontierView’s analysis, which eyes  all the major external factors affecting business outcomes – from macroeconomic trends to regulatory changes to fiscal policy to  security risks  to political surprises. And that’s why the reality of deteriorating US-China relations and the devastating possibility of a  Chinese invasion of Taiwan  have been frequent topics of discussion with clients for years.

One theme of those discussions is the immense challenge multinationals face in calibrating a response to “known unknowns” with extreme implications – such as an invasion. Should a foreign  multinational go so far as to pull out of China, forgoing all future revenue, on the threat of something that may or may not happen? After all, a Taiwan invasion remains a  low-probability threat  in the short term. “Luckily,” that might not be the most important question multinationals need to ask. Instead, they can look to the patterns behind less flashy but just-as-important policy decisions and political statements – which show us that  US-China relations  (and  relations between China and the West  in general) continue to deteriorate, with  new barriers to business  engagement piling on top of  existing ones  and growing evidence that multinationals and governments are backing up their supply chain resilience fears with  concrete action .

Elizabeth Rust
Senior Analyst in Research 

This week’s Lens highlights some of the challenges multinationals will face around the world in H2 2022 and 2023. As the Fed proceeds with its monetary tightening campaign – underscored by yesterday’s 75 basis-point hike – it’s driving some of the  fastest FX depreciation  in years. The  South Korean won  is one of many currencies seeing a drop in recent weeks – along with the  Indian rupee , the  South African rand , and the  Chilean peso .

In effect, the United States is exporting high inflation to the rest of the world: high inflation in the United States causes the Fed to hike rates, Fed hikes drive FX depreciation, local currency depreciation increases domestic inflation as countries face higher import bills. Despite optimism that a recent drop in commodity prices might make inflation “transitory” after all, near-term pressures remain strong in most major markets. That’s the central factor behind recent protests in  Panama Peru Uganda Argentina , and  Morocco .

Meanwhile,  Europe’s deepening energy crisis  promises a winter of energy rationing, production shutdowns, and further shortages of key inputs. It’s a big problem for Europe – which is on track for a recession. And it’s a problem for companies and countries that source industrial and capital goods from Europe – since Europe’s governments will  prioritize production for domestic needs  ahead of foreign orders.

It sounds like a lot of doom and gloom – but the latest update to our global macro scenarios shows how companies can weather the storm and stay ahead of the competition by focusing on short-term resilience, while  preparing for the eventual recovery .

Elizabeth Rust
Senior Analyst in Research

Will a recession ease the labor market challenges many multinationals are facing? 

We’re hearing questions like this every day, particularly in markets that have been experiencing post-COVID issues with retention and hiring, for example, the US. The picture globally is mixed, but in Europe and  in the US in particular , multinationals should be cautious about assuming that their staffing challenges are over. While recessions in both markets will drive up unemployment, a combination of reduced labor market participation, industry-level dislocations (like in the air travel industry right now), and worker expectations about salary hikes will come together to ensure some continued pressure on employers.

Over the coming months, expect to see growing  protests  and pressures from workers across both  emerging  and  developed  markets, pushing for salary adjustments to reflect galloping inflation. In many markets, wage growth will fail to match inflationary pressures, cutting real wages for employers. But wage growth will increasingly become a priority issue for governments around the world as they draft budgets for 2023, potentially putting pressure on employers going forward. All in all, companies should be prepared for some reprieve, but not a full reversal to the power dynamics between employers and employees since the pandemic.

Elizabeth Rust
Senior Analyst in Research

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About the Author

Elizabeth Rust is FrontierView’s Senior Analyst for Global Economics. She specializes in helping clients understand the key drivers impacting the global economy including energy, commodities, US monetary and fiscal policy and other macro and geopolitical factors. Prior to joining FrontierView, Elizabeth was Senior Economist at Keybridge LLC, an economic advisory firm based in Washington, DC. She also served as the 2018 Europe Fellow with Young Professionals in Foreign Policy and as a researcher with the Conference Board in Brussels. She holds a master’s degree in international economics from Johns Hopkins University (SAIS) and a bachelor’s degree, magna cum laude, from Cornell University. 

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