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After two years of painful pandemic lockdowns and supply chain disruptions, Canadian businesses entered 2022 expecting that conditions could only improve. Those hopes were dashed by a major war in Europe, soaring energy prices and fears of widespread economic chaos.

“To say that this year has not played out the way that most of us expected is a bit of an understatement,” says Stuart Bergman, vice-president and chief economist at Export Development Canada (EDC). “The economic outlook has weakened quite a bit since the first half of the year with headwinds from a rare convergence of challenges.”

EDC’s economics team created a top 10 list of global risks and insights for Canadian companies that are considering an expansion of current export initiatives or seeking to expand internationally for the first time. Our emergence from COVID hasn’t played out quite the way we had hoped, and the outlook is fraught with risk as well as opportunities. By being informed, you’re better prepared to navigate them.

  1. Russia-Ukraine war: Russia may have hoped for a quick end through negotiations, but peace talks broke down this spring and the conflict has turned into a slow grind. “So far, our base case sees a continued war of attrition as the most likely scenario,” Mr. Bergman says. Any expansion of the conflict beyond Ukraine’s borders or the involvement of other countries directly would worsen the negative economic impact.
  2. Energy crisis: Russian President Vladimir Putin’s manipulation of the gas market, exacerbated by this summer’s drought in Europe - which saw hydropower generation down 26 per cent - is keeping pressure high on energy prices, particularly in Europe. “Wholesale electricity prices have skyrocketed,” Mr. Bergman says, along with natural gas prices. That means European energy spending has soared to an estimated US$1.4-trillion from about US$200-million. That energy crunch has not hit Canada and the United States to the same extent, given the countries are not dependent on energy imports.
  3. Stagflation: With energy shocks likely pushing European countries into recession, the risk is now a more generalized “stagflation” characterized by high inflation and low growth. “All this uncertainty will make consumers less willing to run down their savings accumulated during the pandemic and make companies more cautious about production and investment,” Mr. Bergman says. “It likely means that growth in Europe will come to a standstill in a much higher price environment.” He says Europe is likely already in recession and it will remain in negative economic growth through the first quarter of next year. EDC’s outlook is more positive for Canada and the United States, given that consumers have savings and pent-up demand from the pandemic. Still, he adds, there are signs that spending is slowing.
  4. Financial markets: Central banks worldwide have kept interest rates low, which has propelled stocks for more than a decade. The rapid rise in rates in recent months could be painful, hitting equity, credit and even housing markets in certain countries. Higher real yields won’t only lead to higher borrowing costs, but they’ll also make more risky assets relatively less attractive. “We are potentially looking at asset repricing,” he says, “which could expose over-leveraged corporates.”
  5. Corporate defaults: Tied into EDC’s fourth risk, corporate debt has soared during the pandemic, which translates into “a much greater corporate sensitivity to corporate rate increases and presents a very serious vulnerability for the global economy,” Mr. Bergman explains.
  6. Sovereign debt risk: Corporations were not the only ones relying on lower interest rates to stock up on debt. Government debts ballooned during the pandemic, raising concerns around riskier European sovereigns such as Italy, which has a government debt load of more than 150 per cent of GDP, Mr. Bergman says. He adds developing countries could also be hit as higher rates reverse capital flows into emerging markets to “safer” developed markets.
  7. Global food security: Higher food and energy prices have resulted in political instability in the past, Mr. Bergman notes. “Think about the Arab Spring, for example, we have already started to see hints of that in certain markets.” EDC recently created a list of 18 countries (mostly located in Africa and the Middle East) that it considers the most vulnerable to potential food and energy shortages based on their dependency on food and fuel imports.
  8. Supply chain vulnerabilities: EDC does not believe the risk posed by integrated global economic networks will fade with the pandemic. “All it takes is an extreme weather event or a geopolitical event or even another global pandemic to very easily disrupt supply chains again,” Mr. Bergman says.
  9. Unwinding of globalization: Just as companies are looking to secure their production processes, governments are also looking to adopt more industrial policies that safeguard them – or at least safeguard certain strategic sectors – and reduce economic dependency, Mr. Bergman explains. Examples include medical supplies and equipment post-pandemic - moves he says increase costs and could jeopardize wealth creation for trade-dependent countries such as Canada.
  10. ESG regulation: The urgent need for action on climate and other ESG (environmental, social and governance) challenges is putting more pressure on governments and industry to demonstrate commitment in these areas, Mr. Bergman says. “These commitments are quickly moving from voluntary programs to regulatory requirement. Companies not ready for these changes or that haven’t factored in transition costs could be priced out of the market.”

Despite the many risks, the EDC’s forecast for global growth this year is positive: It expects the world economy to grow 2.2 per cent this year and 2.6 per cent in 2023.

“We believe the global economy will sidestep a recession, but that is not the case for all economies,” Mr. Bergman says.

He likens the global economy to a bicycle that is becoming more unstable as it slows, vulnerable to tipping if it hits any small obstacle.

“With a bike like that, all it needs to do is hit a small pebble in the road, and it can tip over. The problem is those pebbles are littered all over the place.”


Advertising feature produced by Globe Content Studio with EDC. The Globe’s editorial department was not involved.

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