Coined for military operations, the acronym for a volatile, uncertain, complex and ambiguous external environment has become highly used in management and in economics when explaining operating environments. The past few years have reaffirmed that we are truly living in a VUCA world and, looking into 2022, the trend is expected to continue.
Globally, the spread of the Omicron variant is already restarting a phase of measures and lockdowns, which will further impact already-strained supply chains and increase the uncertainty around a robust economic recovery. Risks to the global economy remain on the downside as global inflation concerns have already forced central banks to review their monetary policy stance.
Gone was talk from the Federal Reserve, the European Central Bank or the Bank of England that rapidly rising prices were temporary, transitory or transient. Instead, they began to worry about high inflation being “persistent”. The global economy faces two main challenges: supply-chain constraints and energy inflation.
The shipping bottlenecks have exposed one of the most serious threats to the global economy as it continues to slowly emerge from the pandemic: whether the worldwide shipping jam remains gridlocked or begins to flow again in 2022.
If the bottlenecks persist, freight costs will remain high, space for cargo on ships will be limited and retailers and manufacturers will have to endure chronic delays. That could, in turn, fuel inflation, prompt supply-chain upheavals and accelerate consolidation of shipping networks, fundamentally changing world trade.
On the energy front, the global economy was shaken by a major crisis in 2021. Prices of oil, gas and electricity surged as our economies reopened after the shutdowns imposed in response to the COVID-19 outbreak. Though last year’s events were extraordinary on many levels, spikes in energy prices are a common phenomenon.
Since the 1970s, sharp movements in energy prices have been a recurring source of economic dislocations and volatility. And, yet, the roots of today’s shock are likely to go deeper. While, in the past, energy prices often fell as quickly as they rose, the need to step up the fight against climate change may imply that fossil fuel prices will now not only have to stay elevated but even have to keep rising if we are to meet the goals of the Paris climate agreement.
With an election this year, further uncertainty might also impinge on the recovery- JP Fabri
On a local level, this will leave an impact on our small and open economy, which depends entirely on imports across a number of sectors. With inflation edging up and local businesses feeling the pinch of tighter supply chains, 2022 is expected to lead to higher cost-push inflation. Economic fundamentals remain strong and forecasts see the economy continue to recover robustly.
However, uncertainty around the spread of the virus is expected to impinge on the tourism industry. The temporary support measures the government implemented, and saved thousands of jobs and various enterprises, are also expected to taper off.
Malta is expected to continue making headway in its efforts to be removed from the grey list and one hopes that the possible risks will be mitigated as much as possible. With an election happening this year, further uncertainty might also impinge on the recovery.
From an economic point of view, it is imperative that Malta’s productivity is high on the agenda as it is only through a sustained improvement in productivity that the island can remain competitive, attract investment, sustain public finances and contribute to an improved quality of life.
It is, therefore, critical for the country to address sectors that are losing in terms of productivity and reforms to support such improvements need to be given priority and incentivised. It is specifically for this reason that government support tied to COVID should also include conditionality elements that focus on implementing measures that tangibly improve productivity.
As we look ahead, the operating environment remains highly uncertain on a global level. Further government-led investments, especially as European funds start being disbursed and invested into the economy, will support the recovery.
The effective implementation of various strategies and policies will also play a key role in supporting the recovery as well as using Malta’s traditional agility to carve out new opportunities in emerging sectors or markets. Agility and adaptability will, in fact, be key ingredients for Malta’s resilience in 2022.
JP Fabri is a co-founding partner of Seed