Interest rate rises are being implemented in many countries, as central agencies look to control inflation. In May 2022, the US Federal Reserve announced a half percentage point interest rate increase, the highest in 22 years and part of a tightening cycle likely to continue through 2022.

As interest rates are increased, consumers typically purchase less and inflation should slow down, but the fall in demand in an economy can also increase unemployment. Central banks try to get the balance between higher interest rates and lower inflation without unduly impacting unemployment and hindering economic activity. Having grown used to low interest rates, many households have taken on large mortgages, so small increases in interest rates may be all it takes to sufficiently impact cashflow and consumption.

Securing skills

Labour shortages are another factor putting business under strain. Unemployment levels are down, and job vacancies are up in many developed regions. For example, in Germany, unemployment fell from 5.8 percent to 5.1 percent over the year to May 2022, but job vacancies are up from 693,000 to 864,000. It is a similar story in Australia, where unemployment fell from 5.1 percent to 3.9 percent, but job vacancies increased from 228,000 to 423,000.

In a clear indication that employers cannot source enough employees, job vacancies in the USA are approaching 12 million (US Bureau of Labor Statistics). In the UK, vacancies stand at 1.3 million (Office for National Statistics).

Socio-cultural trends have been drivers for the tightening of the labour pool, such as the so-called “great resignation” and the “great retirement”. During COVID-19 lockdowns many workers reconsidered the role of employment in their lives as they faced sickness and burnout. This was demonstrated by the 47 million job resignations seen in the US in 2021. Overall, US labour force participation fell from 63.4 percent to 62.3 percent over the course of the pandemic, which equates to 3 million fewer workers in 2022 (US Bureau of Labor Statistics).

The problem has been exacerbated by a delayed resumption of labour migration. Large movements of international labour have not yet fully resumed. Most international flights are back in service, but sporadic border closures or restrictions continue to occur. The global travel and tourism sectors are not projected to return to pre-pandemic levels until 2023.

Labour shortages are apparent in many industries. It is common to see shops, and cafes closed as a result of staff deficits, but the problem extends to construction trades, healthcare, transport workers such as truck drivers and bus drivers, factory workers, IT and digital staff, as well as skilled professionals such as engineers and technicians. This means that the available workforce is in a strong position to negotiate pay rises or move between jobs for higher pay, a factor that adds to inflation.

These challenges may not abate any time soon, but organisations and sector bodies need to plan now to secure skills for the future – presenting a compelling vision of their industry to attract a diverse pipeline of talent. Without a steady influx of new blood, the impacts felt due to tightening labour markets could be sustained over the long term.

Energy insecurity – a catalyst for renewables?

During the height of the pandemic, global carbon emissions temporarily reduced as people were in lockdowns and travel was curtailed. Now, the recovery has driven up demand for electricity and carbon emissions have risen to an all-time high. This is even with renewables-based generation estimated to have exceeded 8,000 TWh to reach record levels in 2021 (International Energy Agency). Wind and solar PV account for more than half of this increase.

The war in Ukraine has impacted global energy supplies and there has been a dramatic dilution in the availability of Russian oil and gas in Europe. Governments and energy companies are now seeking ways to accelerate progress towards renewables in the face of energy insecurity and price spikes.

Smart grids, electric vehicles, hydrogen, carbon storage, small modular nuclear and more wind and solar projects are all being progressed. In the United States, the Infrastructure Investment and Jobs Act provides a massive capital injection into these technologies, as well as more public transport, safer drinking water, road and bridge maintenance and more technology to address future needs. One commodity that looks set to remain expensive is copper, which is vital to this renewable energy revolution under way.

A slowdown in global growth

Looking forward, the global economy faces the prospect of further inflation, driven by supply-chain bottlenecks, higher commodity prices, raised energy costs, labour skills shortages and the continued conflict in Ukraine.

There is a growing opinion that potential recessions may occur in some markets around the world. However, given the large gap between job vacancies and applicants, the situation could translate into fewer job advertisements rather than a significant rise in unemployment and a global recession.

The current supply volatility is likely to drive increased reshoring and ‘friend-shoring’ of manufacturing and supply chains as a component of broader strategies to build greater supply-chain resilience. However, deglobalisation may make it more difficult for developing countries to achieve growth by acting as a brake on foreign direct investment.

Some of these issues are temporary, but others could persist long term. Higher commodity and energy prices are largely caused by the current supply-demand mismatch. As major commodity producers and OPEC increase production, prices should ease from the end of 2022. Supply-chain bottlenecks should also reduce as the impacts of the pandemic decline, and the global shipping system moves back towards its previous equilibrium. This would help slow down the rate of inflation in traded and manufactured goods.

The IMF does not expect reduced economic growth for 2022 to be offset in 2023, having also lowered its forecast for next year from 3.8 percent to 3.6 percent. This serves as an important reminder to policymakers and businesses alike that they need to focus on driving innovation, improving productivity and building models for robust, inclusive economic growth to mitigate inflationary risk and avoid falling into a period of stagnation.