QUARTERLY FORECASTS
2022 Second-Quarter Forecast
40 MIN READMar 28, 2022 | 00:00 GMT
Overview
During the second quarter, the world will continue to feel the impact of the war in Ukraine, high inflation, energy crunches, supply chain bottlenecks and a weakening — but still present — COVID-19 pandemic. Even if negotiations between Moscow and Kyiv make progress, the West will keep most of its sanctions against Russia in place, which will result in prolonged political and economic uncertainty. In the meantime, high energy prices will slow economic growth worldwide, negatively impacting households' cost of living and businesses' operating costs. Food and energy inflation will be particularly problematic because it will keep the risk of social unrest high, especially in emerging and developing countries where governments have less fiscal room to mitigate its impact. Against this backdrop, large central banks will struggle to find a balance between fighting inflation and encouraging growth as they seek the right speed to phase out their expansionary monetary policies.
In the meantime, much of the world will continue to transition to a "living-with-COVID" strategy that prioritizes economic growth over social distancing measures. Most countries will continue to soften, and in many cases completely lift, their lockdown measures as they seek to boost economic activity. But the process will be particularly slow in China, where authorities are likely to remain skeptical about a quick reopening. In addition, the threat of new, more contagious, variants of the virus is not gone, meaning some regions or countries may reintroduce social distancing measures for short periods.
FORECAST
Global Trends
5 MIN READMar 21, 2022 | 17:23 GMT
A woman signs a Ukranian flag at the Ukraine Pavillion Expo 2020 in Dubai
As the Ukraine War Continues, So Does Russian Political and Economic Isolation
The invasion of Ukraine will lead to Russia's increasing economic and political isolation from the rest of the world, particularly as civilian casualties mount. Even if negotiations were to result in a cease-fire, significant sanctions on Russia will remain in place for an extended period and the exodus of Western companies from Russia will continue; companies leaving Russia are unlikely to reverse their decision in the short to medium term. NATO countries will maintain a high level of military aid for Ukraine, but will refrain from taking steps that could lead to their direct involvement in the conflict, such as implementing a no-fly zone in Ukraine. This will likely prevent the war in Ukraine from spreading to other parts of the world. As Russia's offensive advances and civilian casualties increase, the United States, European Union and members of NATO will scale up their sanctions against Russia, but differences in dependence on Russian oil and natural gas imports will keep the European Union and the West divided over implementing blanket sanctions targeting Russian oil and natural gas exports. China will maintain rhetorical support for Russia and many Chinese companies will maintain their operations in Russia, but China's large banks and national champions are unlikely to violate Western and U.S. sanctions to avoid economic damage. Nevertheless, Moscow will view Chinese companies as an alternative to Western investors, and Chinese companies could expand their presence in Russia and take control of assets or get involved in projects that Western companies leave behind.
High Commodity Prices Add to Global Inflation Woes
The conflict in Ukraine will cause economic headwinds in the second quarter, primarily due to food, fertilizer and energy price inflation, further undermining global economic recoveries and hitting the poor the hardest. Despite Western sanctions largely exempting Russian energy and agricultural products, the Ukraine conflict will cause food and energy prices to remain high in the quarter as Western majors shun some purchases of Russian crude oil and Russia restricts exports of certain raw materials, like fertilizers. The price of European crude oil benchmark Brent could remain above $100 per barrel for most of the quarter. High commodity prices will put more pressure on the Bank of England and the Federal Reserve to continue with their interest rate hikes to curb inflation, but the European Central Bank is likely to delay such a decision until later in the year due to the eurozone's meager economic growth. Rising prices of basic necessities will force many governments to respond with tax breaks or social spending programs — at the price of pervasively deep fiscal deficits — in order to offset the financial pain that poorer segments of their societies experience or risk protests. While some Western governments can afford such programs, emerging and developing countries whose governments have significant U.S. dollar-denominated debt will face more difficulty in expanding social spending programs as they are hit by the Fed's monetary tightening policy strengthening the U.S. dollar and the higher commodity prices. For countries facing fiscal challenges like Turkey, Egypt, Ghana and Ethiopia, the two forces will exacerbate their situations, and could lead to protests and further debt crises.
A Lengthy Conflict in Ukraine Brings More Cyber-Risks to Europe, North America
The Ukraine conflict will also keep cyber-risks in Europe heightened as nation-state and nonstate threat actors carry out cyberattacks connected to the conflict and carry out information warfare campaigns. Russia-linked hacking groups will use data-wiping and -encrypting malware in their attacks against Ukrainian organizations, keeping the risk high that malware will affect machines of Western organizations that work closely with Ukrainian counterparts. As the conflict in Ukraine drags on and Western sanctions remain in place, the risk of Russia-linked hacking groups directly targeting U.S. and Western organizations to retaliate for sanctions will increase. The conflict in Ukraine is also blurring the line between Russian nation-state threat actors and cybercriminals. Nationalistic Russian ransomware gangs could more brazenly target Western organizations and critical infrastructure operators in attacks, either in coordination with the Russian government or for their own ideological motivations.
Western Countries Rapidly Adopt 'Live-With-COVID' Strategies
As the number of cases and hospitalizations from omicron continues to trend down in most countries, governments are accelerating their "live-with-COVID" strategies, which will provide some relief to their services sectors and could ease some supply chain disruptions. In our annual forecast, we laid out that most countries would adopt a live-with-COVID strategy this year, and omicron's rapid rise and decline in the West will accelerate that process. Most Western countries are removing pandemic restrictions and are likely to leave things that way barring a new variant that spreads as rapidly — if not faster — than omicron and that is more dangerous. Given their more aggressive strategies, East and Southeast Asian countries could face more challenges in adopting a live-with-COVID strategy. Even if China takes steps toward relaxing its zero-COVID strategy, the country will deal with localized outbreaks that it will struggle to contain, potentially leading to a return to lockdowns.
FORECAST
Asia-Pacific
6 MIN READMar 21, 2022 | 17:22 GMT
file footage of a North Korean missile test
Key Trends for the Quarter
China's Economic Struggles and Diplomatic Humility
China's continued zero-COVID policy may spur renewed manufacturing relocations outside the country, while its push to secure energy supplies could worsen South China Sea tensions. Beijing will slowly ease real estate capital restrictions in an effort to recover fixed asset investment (a key driver of China's economy) but sectoral revenues and broader fixed asset investment will remain low compared to previous years despite renewed state-led infrastructure investments, putting a further drag on economic growth and hurting the Chinese Communist Party's chances of achieving its ambitious 5.5% annual GDP growth target. China will seek to find new sources of energy, food and raw materials in the wake of Western sanctions on Russia. This may spur higher state revenues for Asian commodities exporters like Indonesia and Myanmar, but could also lead to an unintended maritime clash between China and either Vietnam, the Philippines or Indonesia as China deepens oil and gas exploration in the South China Sea. China's zero-COVID strategy (which is characterized by heavy social restrictions and sudden supply chains disruptions) will persist, as will restrictions in Hong Kong, prompting further investment and manufacturing flight out of both territories as the "live-with-COVID" strategies of other regional countries attract business despite higher caseloads. China's diplomatic isolation amid its tacit support for Russia's invasion of Ukraine will prompt Beijing to redouble efforts to strengthen trade partnerships and settle disputes with U.S. partners and allies. Such efforts may include easing Australian trade restrictions, advocating for China's membership in the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, or easing sanctions on EU members of parliament in order to resume negotiations for the EU-China Comprehensive Agreement on Investment. Progress on these fronts may be limited, but China may nonetheless engage in fewer diplomatic spats as it seeks the goodwill of hesitant U.S. partners.
Elections Test U.S. Security Coalition
While leadership changes in South Korea, Australia and the Philippines are unlikely to result in drastic disruptions in security cooperation with the United States, nuanced shifts in the balance with China are possible. The new South Korean government will likely herald warmer relations with Japan, boosting U.S. efforts at trilateral security cooperation on the Korean Peninsula and in maritime competition with China in the East China Sea, which over time will ease the U.S. security burden in the region. If the Philippines' Ferdinand Marcos Jr. and Sara Duterte win the presidency and vice presidency, respectively, on May 9, the duo is likely to maintain current President Rodrigo Duterte's amenable stance toward China on South China Sea territorial disputes and seek bilateral resolution mechanisms that exclude the United States in a key region for the U.S. Free and Open Indo-Pacific strategy. This could make it harder for the United States to push back against Chinese territorial and military encroachment in the region. If the Labor Party wins the Australian federal election due on or before May 21, Canberra could pursue a more balanced strategic and trade policy toward Beijing, giving some nuance to current Australian Prime Minister Scott Morrison's near-unqualified commitment to maritime security cooperation with the United States in pressuring China from the Pacific Islands region. All three of these countries are long-term U.S. defense partners, so major changes in security cooperation are unlikely, but more nuanced shifts regarding the degree to which countries balance between Chinese and U.S. security interests in specific theaters, like the South China Sea, are possible.
Escalating North Korean Missile Tests
North Korea is likely to continue conventional weapons development, expanding its options for non-nuclear responses to peninsular security threats, but a resumption of nuclear or intercontinental ballistic missile testing could shift U.S. and South Korean aims in negotiations to arms control rather than denuclearization. Despite ongoing testing, new conventional capabilities do not signify an increased likelihood of a North Korean attack on South Korea or the United States in the short term, and the United States is likely to encourage the continued transfer of operational control of forces to the South Korean military. North Korea's continued development of mobile launch sites, however, will raise concerns over the type of missile being tested, as mobile launches are more advantageous for military missiles than civilian satellites, which the north aims to use for improved surveillance of the United States. Should Pyongyang restart nuclear testing or resume ICBM testing over Japan instead of continued testing in the sea between the two countries, South Korea may expedite the deployment of missile defense systems to defend against the ballistic missile threat. With the United States still focused on Russia's invasion of Ukraine and its long-term strategic competition with China, renewed Korean Peninsula concerns would have to compete for attention from the Biden administration.
Supply Chain Uncertainty Complicates ASEAN Recovery
The war in Ukraine, global differences in COVID-19 policies and commodities market fluctuations will drive supply chain and economic growth uncertainty in East Asia and especially Southeast Asia, complicating manufacturing recoveries and encouraging political turnover. The war may impede global flows of key inputs for the tech industry, impeding Asian governments' plans to expand their chip production to boost national innovation, advance manufacturing capabilities and improve tech self-sufficiency. In addition, persisting high fuel prices will also impair national manufacturing recoveries, including in Vietnam, while rising food and raw materials prices will deepen Myanmar's economic turmoil as the country leans into another year of civil war. Myanmar's social and political situation may increase refugee flows and COVID-19 spread — due to the junta's poor ability to administer health care and the country's scant revenue — into the rest of mainland Southeast Asia, complicating governments' transitions to live-with-COVID strategies and potentially introducing tighter border restrictions. Rising fuel prices will also cause Association of Southeast Asian Nations governments to reconsider price caps and fuel subsidies, increasing the chances for political turnover via electoral upsets and adding to already simmering unrest in Thailand amid economic uncertainty. General energy insecurity could prompt new administrations in the Philippines, South Korea and Japan to reconsider expanding or resuming nuclear power capacity, reigniting environmental debates and questions of foreign investment, particularly from China, and the political influence that often accompanies it.
Key Dates to Watch
April 1: EU-China Summit
May 8: Hong Kong chief executive election (unless postponed)
May 9: Philippines presidential, vice presidential, and some House and Senate seat elections
May 21: Deadline for Australian elections for all House seats and a majority of Senate seats
May 22: Bangkok gubernatorial election
FORECAST
Europe
7 MIN READMar 21, 2022 | 17:23 GMT
Ukrainian President Volodymyr Zelensky addresses the Italian Parliament via live video from the embattled city of Kyiv
Key Trends for the Quarter
Public Spending Levels to Remain High in Europe
European institutions and national governments will increase public spending to cope with the global energy crisis and the war in Ukraine. This will ensure continued economic growth, but also contribute to inflation and increase the risk of a debt crisis. The European Commission will relax the implementation of EU rules on state aid so that national governments can assist companies negatively impacted by high energy prices, sanctions against Russia and the overall increase in geopolitical uncertainty. Brussels will also urge EU governments to redirect grants and loans from the EU COVID-19 recovery fund to assist households and companies in distress. While governments will debate whether to authorize the commission to borrow on financial markets on their behalf, a decision may not be reached during the quarter because of internal divisions. The rise in global economic uncertainty will also reactivate the debate over whether to reform EU sovereign debt and fiscal deficit rules known as the Stability and Growth Pact. While a radical reform of the pact is unlikely due to resistance from Northern European governments, the Continent's growing economic challenges mean there will be room for a compromise to allow some spending areas (such as spending on the energy transition or defense) to be excluded from the calculations of a country's debt or deficit. The combination of all these expansionary policies will probably ensure continued economic growth in Europe during the quarter. But they will also keep inflation high, which will reignite the debate within the European Central Bank over whether interest rates should be hiked faster than anticipated (though a hike is unlikely to materialize during the quarter as the bank prioritizes growth). These measures will also result in pervasively high fiscal deficits and sovereign debt levels that could result in financial crises in the future.
Europe's Push for Energy Diversification to Accelerate
The European Union will adopt measures to accelerate its energy diversification away from Russia, but the process will be uneven and will last well beyond the quarter. The European Union will start to implement a plan to replace tens of billions of cubic meters of Russian natural gas by increasing LNG and pipeline imports from other sources, doubling the production of biomethane, and other measures. The bloc is also likely to announce measures to increase the production and import of renewable hydrogen, accelerate the installation of photovoltaic panels on buildings and farms across the European Union, and accelerate permitting procedures for on- and off-shore wind capacity and large-scale solar projects. In April, the commission will issue a legislative proposal requiring gas storage facilities in the bloc to be up to 90% full by Oct. 1 every year. These measures will take months (and in some cases years) to implement, however, meaning the bloc will not significantly reduce its dependence on Russian natural gas during the quarter, a situation that will keep the bloc from banning the purchases of Russian oil and natural gas. In the meantime, individual member states may announce plans to increase their reliance on nuclear energy while others are likely to slow down the phaseout of coal. Collectively, these moves could make it harder for the European Union to meet its carbon dioxide reduction targets for 2030, and could influence companies not to move away from coal as quickly as originally planned.
Crucial Presidential and Legislative Elections in France
France will elect a moderate president and National Assembly that will push for deeper EU economic, political and military integration. France will spend the entire quarter in electoral mode, with two rounds of presidential elections in April followed by two rounds of legislative elections in June. In both elections, voters will likely support moderate, pro-European parties that will defend France's role in the European Union and the eurozone and propose deeper European political, economic and security integration. While far-right or -left parties could perform well in both elections, the risk of one assuming control of the presidency or National Assembly such that France could exit the European Union or the eurozone will be very low. President Emmanuel Macron will use the electoral campaign and the war in Ukraine to push for reduced EU dependence on Russian energy by diversifying the bloc's energy sources and increasing the use of renewable energy and nuclear power. Macron's reelection will also see him promote greater cooperation on defense issues, including joint research, development and procurement, although the debate over these processes will extend well beyond the quarter. In the meantime, France's electoral season will also result in the European Commission slowing down the ongoing negotiations over free trade agreements, a controversial issue in France. This will slow negotiations with countries like Australia and New Zealand, while the ratification of agreements with blocs like South America's Mercosur will remain frozen.
East-West Tensions within the EU to Calm Down
The crisis in Ukraine will increase political stability in Central Europe and mitigate disputes with EU institutions, which will secure continued access to EU funds, at least temporarily. The war in Ukraine will contribute to the stability of previously fragile governments in countries like Poland and Romania as geopolitical concerns and the need to show a united response to Russia will temporarily put domestic political differences aside and allow their coalition governments to survive. Political and social stability will likely be short-lived, as an improvement of the conditions on the ground in Ukraine or a lowering of the perceived threat from Russia eventually will likely see a return to prewar internal political disputes. Countries in Central and Eastern Europe will keep their borders open to migrants escaping the war as they express solidarity with Ukraine, while countries in Western Europe will accept some of these migrants in their own territories. In addition, the European Commission will probably refrain from escalating its rule of law disputes with countries like Poland to avoid deepening internal EU divisions at a time of worsening relations with Russia, which will ensure continued access to EU funding for Warsaw and others. Finally, the war in Ukraine increases the probability of the United Opposition winning Hungary's parliamentary election April 3, as the ruling nationalist Fidesz party will struggle to distance itself from the Kremlin after years of expressing political sympathy for Russia. This could open the door to a pro-EU Hungarian government that reduces disputes with Brussels over rule of law issues and secures Budapest's continued access to EU funds.
The EU and the U.K. to Look for Compromises in Northern Ireland
The conflict in Ukraine and political calculations will result in the European Union and the United Kingdom toning down their dispute over the Northern Ireland protocol, which will open the door to compromises to avoid a trade war. Northern Ireland will hold a legislative election in May in which Unionist parties will campaign for the abolition of the Northern Ireland protocol while Republicans will support the protocol. Against this backdrop, London and Brussels will continue negotiations to amend the protocol and avoid a collapse in the talks that could result in more sectarian violence in Northern Ireland. The conflict in Ukraine will also convince Brussels and London to avoid a trade war that could create additional problems for their economies at a time of rising global uncertainty. If Brussels and London fail to reach a mutually acceptable amendment of the protocol, they will likely postpone the enforcement of some aspects of it to make sure that goods between Great Britain and Northern Ireland continue to move with minimal disruptions for several more months until a permanent solution is found. While widespread violence in Northern Ireland is improbable, the electoral season could result in a temporary spike in demonstrations, limited clashes between Republican and Unionist groups, and small-scale attacks and acts of sabotage, especially against customs infrastructure and staff, but also against other politically symbolic targets.
Key Dates to Watch
April 3: Parliamentary elections in Hungary
April 10: First round of France's presidential election
April 24: Second round of France's presidential election
June 12: First round of France's legislative elections
June 19: Second round of France's legislative elections
June 23-24: European Council summit
June 26-28: G-7 Leaders Summit in Germany
June 29-30: NATO Summit in Spain
FORECAST
Middle East and North Africa
5 MIN READMar 21, 2022 | 17:24 GMT
Aramco oil facility near al-Khurj area, just south of the Saudi capital Riyadh
Photo by FAYEZ NURELDINE/AFP via Getty Images
Key Trends for the Quarter
A Deal for Iran’s Nuclear Program Would Change Little Else
The United States and Iran may reach a deal to resume compliance with the 2015 Joint Comprehensive Plan of Action in the second quarter, but regional tensions will persist. An agreement would allow Iran to boost its oil exports by as much as 1.5 million b/d, alleviating the currently tight global oil market and giving Iran an incentive not to target U.S. interests and partners in the region as aggressively. Although a deal is possible, significant roadblocks remain that could derail negotiations. If an agreement is not reached in the first half of the quarter, then escalation will become more likely due to Western concerns that Iran's rapidly advancing nuclear program may soon reach a stage where the JCPOA no longer can achieve its nonproliferation objectives. Any escalation would likely involve Iran and its proxies more frequently targeting oil infrastructure and commercial vessels in the Middle East. Regardless of whether there is a deal between Iran and the West, Iran and Israel's so-called "shadow war" will continue, as Israel will remain focused on Iran's missile program and its support of proxies in Lebanon, Iraq and Syria — issues the JCPOA does not address. Consequently, Israel will continue to launch covert and overt operations against Iran's allies aimed at degrading Tehran's capabilities to project force near Israel's borders.
Erdogan Friendly Abroad but Combative at Home
Turkey will improve relations with regional rivals in order to increase trade and investment flows, but Ankara will not introduce significant changes to its domestic economic strategy unless political conditions deteriorate significantly. Roaring inflation, a weakening lira and new global economic interruptions caused by the Russian invasion of Ukraine will continue to weaken Turkey's economy, further undermining public support for the governing Justice and Development Party (AKP) ahead of June 2023 elections. President Recep Tayyip Erdogan will, however, likely continue his low-interest-rate approach to growth. By virtue of his control over the Central Bank and over most of the opposition who used to balance him, Erdogan holds the levers of power over economic policy, so his calculations will drive the country's economic strategy. Turkey will likely continue to improve relations with former rivals from Greece to Israel to Saudi Arabia in hopes that a softer diplomatic approach will yield increased investment and trade, easing the economic crisis at home. To that end, Turkey will also likely try to maintain neutrality in the Russo-Ukrainian war given its worries over the economic effects should Russia cut energy and food exports to Turkey. Its neutrality will be challenged by its fellow NATO allies, and will weaken should Russia directly provoke Turkey through accidental clashes with Turkish assets or allies in the Black Sea, Syria or the Caucasus.
A Threat of Violence After Lebanon’s Elections
Lebanon's May elections will not break the country's political impasse and might spur violence and emigration as more Lebanese lose faith in the state's ability to handle the economic crisis. Lebanon has not fundamentally restructured its sectarian election system, which means that most parties in power will return with similar results as the 2018 election. This will leave establishment parties — which lack an interest in deeply reforming the country's budgetary or economic policies, preferring instead to await fresh international aid — in place. As a result, public protests and strikes are likely, but these are unlikely to convince establishment politicians to begin a serious reform path given that previous nationwide protests have not forced changes and because the elections will not change the incentives that keep establishment politicians from reform. Public anger may manifest into violence that could trigger sectarian clashes. Higher fuel and food prices in the wake of the Russo-Ukrainian war will exacerbate such unrest. With the political process paralyzed and the economy stagnating, more middle class Lebanese are likely to emigrate while poorer Lebanese emigrants attempt the sea journey to Europe, worsening the country's brain drain and pulling more capital out of its weakened banks.
America’s Gulf Allies Push Back
Saudi Arabia and the United Arab Emirates will leverage their positions as major oil producers to win diplomatic concessions from the United States on their human rights records and military intervention in Yemen. With oil supplies uncertain in the wake of the Russian invasion of Ukraine and subsequent Western sanctions campaign, Saudi Arabia and the United Arab Emirates will push back against U.S. criticism and pressure. Though they are unlikely to break with OPEC+ production quotas unilaterally, they will leverage their influence to calm oil markets in exchange for improved relations with the United States and potential U.S. support for their intervention in Yemen and defense against Iran and its regional proxies. The United States is likely to provide fresh diplomatic and intelligence support in Yemen, where Washington was already moving closer to Abu Dhabi and Riyadh, and also is likely to discuss new U.S. arms sales to secure the Saudis and Emiratis.
The Land of Two Prime Ministers
In Libya, rival prime ministers will vie for international and domestic legitimacy, which could lead to disruptions in the export of the country's oil and gas resources. The Libyan parliament's March 1 approval of a new prime minister has resulted in competing prime ministers who will seek to gain international legitimacy in order to gain control of Libya's economic and government organizations, including the national oil company. Supporters of newly appointed Prime Minister Fathi Bashagha could shut down Libya's oil exports if Prime Minister Abdulhamid Dbeibeh does not step down, which could exacerbate the tight oil market. If Bashagha tries to move the government from Tripoli, violence could break out in the capital between different rival militias.
Key Dates to Watch
April 2 - May 2: Ramadan
May 15: General election in Lebanon
FORECAST
Eurasia
5 MIN READMar 21, 2022 | 17:25 GMT
Smoke rises from a Russian tank destroyed by the Ukrainian forces on the side of a road in Lugansk region
Key Trends for the Quarter
The War in Ukraine Continues
Russia's and Ukraine's radically different strategic goals mean that a sustainable solution to their conflict is unlikely during the quarter. Ukraine will maintain its strategy of repelling Russia's invasion with the goal of causing Russia to sustain enough material and human losses that Moscow softens some of its demands for a cease-fire. Russia's strategy meanwhile consists of progressively weakening the Ukrainian government's resources to force it to accept a cease-fire on Moscow's terms. This means that regardless of any negotiations, Russia will maintain a significant degree of territorial control in Ukraine during the quarter. Moscow will continue its attempts to establish pro-Russian regional regimes in areas such as Kherson and Zaporizhzhia that create a land bridge from Russia to Crimea. The Ukrainian government's reluctance to recognize Russian territorial gains amid Russia's continued seizure and occupation of new areas will strengthen Moscow's demands for a deal that imposes costs that are simply too high for Kyiv to accept, making a complete withdrawal of Russian troops improbable. In an alternate scenario, Kyiv would accept a painful deal at a high territorial and political cost to end the active phase of the war. In this scenario, the deal would codify Ukraine's neutral and demilitarized status on terms largely dictated by Moscow, while Ukraine would also surrender its claims to Crimea and cede the eastern region of Donbas. The deal would allow Ukrainian President Volodymyr Zelensky's government to survive and regain control over some of the regions Russia occupied in eastern Ukraine as Moscow moves to fortify and integrate the Donbas into Russia.
Russia Will Increasingly Feel The Pain Of Sanctions
The Russian economy will contract significantly under crippling sanctions, threatening long-term growth prospects but not causing a change of government or foreign policy. Russia's GDP will contract significantly in the second quarter due to Western sanctions and boycotts, which will likely remain in place or even expand despite a possible end of the most violent phase of the war. Russia will also see a significant increase in inflation, which a likely sovereign default and government efforts to prop up ruble liquidity will accelerate. This will result in stagflation as businesses and consumers seek to minimize their loss of purchasing power by spending on an increasingly shrinking amount of available goods. High prices for hydrocarbons and other commodities of which Russia is a major exporter (most notably, minerals such as nickel, aluminum and titanium), however, will mean that the Russian government can still bring in large amounts of foreign currency and run a current account surplus, providing the government with the means to intervene to stabilize the economy and banking sector in the long run. Russians will see their standards of living fall precipitously, but this will not significantly affect the Kremlin's pursuit of the war in Ukraine let alone spur political change in Russia because of Moscow's efforts to restrict access to information it views as undesirable, increasingly harsh punishments for dissent and the accelerated brain drain of those opposed to Russian actions in Ukraine.
Russia’s Economic Struggles Will Impact Central Asia
Russia's economic turmoil will cause an economic contraction in Central Asia, increasing regional political volatility and creating the risk of social unrest. As Russia's economy severely contracts due to Western sanctions and boycotts, the economies of Central Asia states, which are highly interdependent upon Russia, will undergo their own economic downturns. Kyrgyzstan and Tajikistan, which are heavily dependent on Russian remittances, will likely be hit the hardest as the volume of remittances declines due to the loss of economic opportunities in Russia and sanctions on Russia's banking sector cut off avenues for financial transactions. The ruble's decline will mean that even the remittances that do make it back to the region will be worth less. The depressed economic environment, which will happen on top of the ongoing spike in fuel prices, will increase the risk of social unrest across the region, but governments will likely avoid collapse with a combination of repression and modest support measures. Proponents of extremist ideologies will look to capitalize as the economic downturn deepens, reaching out to millions of potential followers, including the many migrant workers returning to the region from Russia vulnerable to radicalization amid the lack of work. Moscow will pressure regional governments to increase border controls and reduce the ability of Islamists in Afghanistan to link up with sympathetic Central Asian elements, but may be forced to provide security assistance to protect Central Asian governments from destabilization. This would further strain Moscow's budgetary and military resources, limiting Russia's ability to influence political developments in the region and prompting governments to seek economic support elsewhere.
Key Dates to Watch
April 3: Kyrgyzstan's census concludes
April 8: Commonwealth of Independent States (CIS) foreign ministerial summit
April 11-13: Russia International Arctic Forum 2022
May 26-27: Eurasian Economic Forum
May (date unspecified): CIS heads of state summit
June 10: CIS Economic Council meeting
FORECAST
Americas
5 MIN READMar 21, 2022 | 17:25 GMT
Facade of Argentina's Central Bank in Buenos Aires
Key Trends for the Quarter
High Food and Energy Prices Drive Unrest in Brazil
In reaction to high food and energy prices, Brazil will see more frequent labor strikes and social unrest and increased government spending, sparking investor concern about the country's social and economic stability. As President Jair Bolsonaro tries to boost his odds of reelection in October amid record-high global food prices, the government is likely to attempt to limit exports of cereals in an effort to relieve inflationary pressures. International energy prices are likely to remain similarly high as Western powers maintain sanctions on Russia, leading the government to contain the price of gasoline and diesel by either forcing state-owned energy giant Petroleo Brasileiro to keep prices artificially low or by subsidizing fuel prices for a set period. In either case, government spending and a lack of political will to decrease the government's high debt burden will make it hard for Brasilia to reduce its fiscal deficit. Foreign and domestic investors will be wary of the increased state involvement in the Brazilian economy. They will likely wait to issue new investment in the country until after the election, though the country will likely see limited new investment concentrated in its oil and gas sector. Despite the subsidies, households are likely to feel some of the effects of rising prices of food and fuels, providing fodder for domestic unrest (including labor unrest), which could result in supply chain disruptions if strikes target major highways or ports.
The Mexican Government Compromises on Electricity Sector Reform
Horse-trading between the Mexican government and the opposition will result in watered-down reform to the country's electricity sector that decreases the likelihood of USMCA violations. While the opposition coalition Va por Mexico is unlikely to be cooperative ahead of June 5 gubernatorial and regional elections in six states, it has indicated that it will be more open to supporting the government's plans to reform Mexico's electricity sector in exchange for government support on other issues after the election. Though Va por Mexico and the governing National Regeneration Movement are likely to strike a deal on electricity reform, the reforms are likely to be watered-down from what the government had originally wanted. For example, the opposition will demand the preservation of independent regulatory agencies and decreases in the percentage of the electricity sector that will be designated for state-owned electricity company Federal Electricity Commission to control. Weaker reforms will be less likely to violate the United States-Mexico-Canada Agreement than the original government proposal. But even weak electricity reforms, however, will discourage foreign direct investment in Mexico's energy sector for fear that the state will follow up with additional reforms limiting private investment.
Relief From the IMF and the Agricultural Sector Boost Argentina Amid Price Surges
New International Monetary Fund special drawing rights and agriculture export revenue will temporarily stabilize Argentina's economy, allowing Buenos Aires to implement food and fuel subsidies amid rising global prices. Argentina's deal with the IMF will provide $9.8 billion in special drawing rights that Buenos Aires will use to boost its Central Bank's weak dollar reserves. As the price of wheat and oil and gas rise globally, Buenos Aires will be well-positioned to cash in on its wheat and soy harvest (anticipated to be 21 million metric tons of wheat and 40 million metric tons of soy products for the 2021-2022 growing season) as the country's high export tariffs remain in place. Both developments will allow the Argentine government to maintain social welfare spending amid high food and fuel prices, though inflation is likely to remain high and the government will be unable to soften capital controls because of households' and businesses' persistent lack of confidence in the government's economic policies. The stability afforded by the IMF program could lead to a small increase in investment interest in the country's extractive industries such as the petroleum, natural gas and lithium sectors, which have already attracted foreign and domestic investment despite Argentina's overall negative business climate.
U.S. Outreach to Venezuela Will Help Some International Oil Companies
U.S. outreach to Venezuela may result in a narrow agreement allowing exemptions for debt-for-oil swaps, allowing some companies to partially recover their losses. As Washington seeks to mitigate the oil shortages and subsequent price increases created by Russia's invasion of Ukraine, the United States may temporarily ease its formerly hard-line approach of demanding regime change in Venezuela in favor of selective engagement with the Maduro administration. This calculation is likely part of a broader push by the White House to increase the oil and gas supply in the United States amid the crisis in Ukraine. Negotiations could lead to progress toward exchanging oil cargoes to settle the debts of state-owned oil company Petroleos de Venezuela. This could allow a limited number of companies (U.S.'s Chevron, Italy's ENI and Spain's Repsol, among others) to recover some of their losses in the country. In an effort to achieve broader sanctions relief, Venezuelan President Nicolas Maduro will likely reenter Mexico City negotiations with the opposition, where he will likely have to make credible but limited political concessions (such as releasing political prisoners or ending discriminatory practices against the opposition).
Key Dates to Watch
April 22: Second-round vote in Costa Rica's presidential election
May 29: Colombian presidential election
June 5: Gubernatorial and local elections in six Mexican states
June: Summit of the Americas hosted in Los Angeles
FORECAST
South Asia
5 MIN READMar 21, 2022 | 17:26 GMT
An employee of a fuel station updates the latest fuel price list in Islamabad
Key Trends for the Quarter
India's Economy Struggles With High Inflation
In order to mitigate the risk of social unrest at a time of global uncertainty, the Indian government will refrain from implementing substantial economic reforms, a decision that could undermine long-term economic growth. The economic shocks caused by Russia's invasion of Ukraine — including higher energy prices likely to result in rising food prices and supply chain disruptions for goods such as Russian fertilizers on which India depends — are likely to force the Indian central bank to change its growth-oriented strategy and prioritize reducing consumer prices. While this could help India reduce inflation (which was above 6% in January and February), it could also result in slowing economic growth in 2022. While the governing Bharatiya Janata Party performed strongly in the state assembly election in March, giving Indian Prime Minister Narendra Modi political room to implement economic reforms, the government will avoid any controversial policies such as agriculture and electricity sector reforms in the quarter in order to prevent social unrest. The government likely will implement some reforms, however, including leasing out state properties, the privatization of the state-owned Life Insurance Corp. (LIC) and two public sector banks, to increase state revenue. Reforms to simplify labor laws and enable easier compliance by companies and improve India's ease of doing business are also likely since the government now has the political capital to undertake them. Similarly, negotiations over a free trade agreement with Australia will proceed, and an interim trade deal is possible during the quarter
Political Uncertainty Deepens in Pakistan
Political uncertainty will worsen Pakistan's economic situation, reduce the room for an agreement with the IMF, and see the business climate deteriorate. High oil and commodities prices will probably force the Pakistani government to implement additional subsidies and aid programs for low-income households and the industrial sector, which will result in a pervasively high fiscal deficit. In addition, foreign reserves could fall as import bills rise, which will reduce the government's resources to pay for coal and liquified natural gas imports, increasing the probability of power outages that further undermine economic activity. Recent steps to alleviate the economic crisis (which included granting tax breaks to the industrial sector and measures to lower electricity and gasoline prices) failed to prevent the opposition from triggering a vote in Parliament to oust the prime minister, highlighting the political uncertainty in the country. Against this backdrop, Pakistan will struggle to negotiate with the IMF to clear the next tranche of $1 billion as part of its bailout package because the government's recent relief measures breached the terms of the deal with the IMF. On the security front, Pakistan will likely seek to maintain its relationship with the Taliban government in Afghanistan as it continues cease-fire negotiations with the Tehrik-i-Taliban Pakistan and seeks to avoid a possible spillover of instability from Afghanistan into Pakistan. The likely continuation of attacks in Pakistan by multiple militant groups (some of which have targeted or affected civilians), however, will contribute to perceived and real instability, further worsening investor and business confidence in the country.
Afghanistan's Instability Persists
Worsening economic and humanitarian crises, persistent disunity within the Taliban and the arrival of the fighting season could worsen instability in Afghanistan in the coming quarter. The Taliban will continue to struggle with balancing internal, domestic and foreign expectations and interests, which will sustain ineffective governance and instability in Afghanistan. The arrival of the fighting season (which is marked by the end of winter and of the poppy growing season) will likely escalate Taliban attempts to consolidate power across the country, but persistent disunity and the drain of resources from increased fighting will challenge these attempts. The Taliban's frequent abuses will sustain the international community's distrust of the Taliban's expressed commitment to human rights, keeping the chances for international recognition of, and direct foreign economic aid to, the Taliban government low. The likely increase in violent resistance to the Taliban government over the coming quarter and the indiscriminate nature of the Taliban response will also challenge the group's legitimacy among Afghans, further limiting its ability to effectively govern. To facilitate trade and economic activity, the Taliban will engage with neighboring countries to negotiate deals involving mining or gas pipelines, though progress will depend on the evolution of the security situation. Because Pakistan remains a strong advocate for humanitarian assistance and aid for Afghanistan, the Taliban will likely seek to limit tensions related to the contested Afghan-Pakistani border and continue to mediate cease-fire negotiations between the Tehrik-i-Taliban Pakistan and the Pakistani government, allowing the Taliban to balance its strategic partnership with Pakistan and its loyalty to the TTP.
Key Dates to Watch
April (date unspecified): China hosts meeting of the six countries that border Afghanistan
April (date unspecified): Sri Lanka-IMF meeting to discuss a potential support package
May 18: Likely date for Nepalese local elections
FORECAST
Sub-Saharan Africa
5 MIN READMar 21, 2022 | 17:27 GMT
'Africa's Best Mineral' quarry near Carletonville, some 40kms west of Johannesburg
Key Trends for the Quarter
Revenue Windfalls Won’t Dull Social Discontent
South Africa will benefit from high global commodity prices, but continued welfare spending will not dull the social discontent caused by power outages, high inflation and unemployment. In the second quarter, South Africa will gain increased revenue from high global commodity prices resulting in part from the crisis in Ukraine. Coal, platinum group metals, gold, iron ore, manganese and chrome exports, among others, will add to South Africa's recent budget surplus through royalties and export duties. Despite revenue windfalls, state-owned power company Eskom will likely institute rolling blackouts at times due to dilapidated infrastructure, insufficient capacity and high diesel prices. In addition to stoking public discontent and resistance to the ruling African National Congress and President Cyril Ramaphosa's administration, the power crisis will continue to harm the business environment. Meanwhile, the extension of the R350 (about $23) monthly welfare payment will not compensate for exorbitant consumer prices or high unemployment. This means that unrest is probable, with potential flare-ups occurring in reaction to former President Jacob Zuma's ongoing legal woes and contentious wage negotiations with labor unions scheduled to begin at the end of March.
Insecurity in the Sahel Could Expand Throughout West Africa
While France's withdrawal from Mali will leave a void that will harm regional security, the war in Ukraine will limit Russia's diplomatic and security influence, giving local militant groups an opportunity for expansion. French troops will continue to withdraw from Mali and relocate to southern Niger, likely completing their reorganization by the end of the second quarter or the beginning of the third. France will likely continue to carry out airstrikes in Mali from its base outside of Niamey, Niger, and potentially alternate regional bases, which may result in limited tactical successes. Malian security forces will be incapable of independently combatting insurgent groups, including Jamaat Nusrat al-Islam wal-Muslimin (JNIM) and the Islamic State (IS). While the Malian junta planned to have Russian paramilitary forces partially offset the loss of French capabilities, the war in Ukraine means that Russia will likely divert its attention and resources from conflicts in Africa. Without significant third-party intervention to support Malian forces, groups like JNIM and the Islamic State have a window for expanding their attacks from north and central Mali into neighboring states. Because of this situation, Burkina Faso, Cote d'Ivoire, Niger and Togo are likely to see more violent attacks on security forces.
A Humanitarian Catastrophe in Tigray Will Have Economic Implications
The lingering Tigray conflict will extend the humanitarian crisis in Ethiopia and derail central government efforts to attract foreign direct investment. While Ethiopian Prime Minister Abiy Ahmed publicly acknowledged in January that the government would be willing to negotiate with the Tigray People's Liberation Front (TPLF) and the two sides signed a conditional cease-fire March 24, the presence of numerous ethnic militias with disparate interests will complicate the implementation of the cease-fire and any negotiations that follow. While the government will seek to attract investment in the banking, logistics and telecoms sectors, international investors are unlikely to be interested given the uncertainty associated with the ongoing Tigray conflict. Additionally, members of pro-government Amhara militias will continue to call on the government to root out all TPLF fighters from the region, adding pressure on Abiy to appear tough on Tigray and forcing him to balance these domestic demands with international calls for peace. Even if negotiations begin between government and TPLF elites, it will likely take weeks if not months to reestablish the aid supplies and resources needed to alleviate the ongoing humanitarian crisis. Drought and rising fertilizer prices will exacerbate existing food insecurity.
High Commodity Prices Threatens Economic Stability
High food, fuel and fertilizer prices following the Russian invasion of Ukraine will threaten the stability of fragile sub-Saharan African economies. Most African countries will struggle to cope with price shocks during the quarter, which in some cases will lead consumers to protest exorbitant prices of everyday goods. Consumers in Kenya, Tanzania and Nigeria have a strong history of protesting high fuel prices, and these countries are likely to see protests again as households struggle to buy basic goods. Additionally, the global attention on the crisis in Ukraine means that the international community will likely focus less on sub-Saharan Africa, which may result in decreased funding for aid and development projects. Alternatively, producers of oil, gas food and minerals (such as Nigeria, Angola and Equatorial Guinea for oil and South Africa and Ghana for minerals) will reap the rewards of high prices, and it is possible that countries that produce commodities exported by Russia and Ukraine will see increased investment in extractives (like palladium and nickel) and gas. But even for these countries, the short-term gains are unlikely to completely offset the negative impact of food and fuel inflation. Over the course of the year and beyond, countries that attempt to reduce consumer hardship with food and fuel subsidies will face rising deficits, which means that other areas, like social welfare and/or infrastructure investment, are likely to suffer. Additionally, increases in global fertilizer prices will mean lower crop yields in 2022 and for seasons to come, especially for smallholder farmers in places that currently import fertilizer, like South Africa, Zambia, Kenya and Nigeria, likely worsening existing food insecurity.
Key Dates to Watch
Unspecified: Adjusted wage negotiations between a coalition of South African labor unions and the government occur
April 11: Former South African President Jacob Zuma's trial over alleged corrupt arms deals resumes
