Financial markets between inflation and deglobalization

In 2017, Dambisa Moyo, an economist originally from Zambia and naturalized U.S. citizen, was almost prophetic: "Protectionism and deglobalization will give inflation wings," she argued in an editorial in the Financial Times, later also published in Il Sole 24 Ore.

At that time, there had not yet been the Covid-19 pandemic or the war in Ukraine that sent commodity prices soaring, causing a chain reaction on consumer price trends as well.

Yet even then, as U.S. President Trump introduced trade tariffs to favor domestic products, there was a clear sense that a trend that seemed unstoppable had now been reversed.

We are talking about the trend of globalization, through which the economies of all five continents have become increasingly interconnected in the past decades, thanks to free movement of goods and capital and the shifting of production to countries with low labor costs.

For the past few years, there has been increasing talk in debates among economists about deglobalization, a phenomenon diametrically opposed to the one described above. Underlying this reversal of the trend are several factors. First, the emergence in the West of political and cultural movements that are referred to as "sovereignists," that is, advocates of a reassertion of the sovereignty of nation-states, against supranational authorities and against economic forces acting on a global scale.

Another factor that gave impetus to deglobalization was the outbreak of the Covid-19 pandemic, which forced billions of people around the world into social distancing. It was precisely during the pandemic, which caused a temporary paralysis of economic activities around the world, that some critical aspects of globalization emerged: these include, for example, the rapid spread of a virus, or the need to have certain types of production (think surgical masks and medical supplies) not too geographically distant, so as not to run the risk of suffering the consequences of supply shortages in emergency situations.

Into this scenario, once the most acute phase of the pandemic was over, then came the war between Russia and Ukraine, which raised the risk of a blockade of the market for gas and agricultural commodities, of which Moscow and Kiev are major exporters. If this risk came true, there would be entire countries that could even suffer a full-blown food crisis.

The phenomenon of deglobalization, however, has roots that predate the outbreak of the pandemic and conflict. As early as 2019, researchers Mario Lorenzo Janiri and Lorenzo Sala highlighted some data that gave a sign of a trend reversal, which began as far back as 2007-2008, at the time of the Lehman Brothers crack.

The value of goods and services exported around the world, for example, grew vertically until 2007, reaching the unprecedented threshold of $20 trillion. Then, however, it fluctuated in the decade after 2007, moving between $20 trillion and $25 trillion. In short, the increasingly free movement of goods and services to every corner of the globe, after a soaring march, has undoubtedly slowed down.

In this context, precisely international geopolitical tensions have then entered the picture, with the war in Ukraine bringing quite a few sanctions on Russia and challenging old trade balances. According to Gianmarco Ottaviano, professor of economics at Bocconi, in the years to come we should not expect "the deglobalization feared or hoped for by many commentators, but (rather) a selective re-globalization, that is, a reconfiguration of the global economy by integrated groups of related countries, coalitions competing with each other for economic, political and cultural hegemony."

What consequences does this new trend have in the lives of citizens? Many economists today are questioning the link between the recent upturn in inflation, which has returned to the levels of the 1980s of the last century, and the deglobalization trend that has been much talked about for months.

Marc Levinson, an economist and historian who is a columnist for the Institute for International Policy Studies-ISPI, highlighted how the prices of many consumer goods (cars and televisions, clothes and air conditioners) are lower today than they were at the turn of the century because "they are churned out mainly by factories located in low-wage countries that use resources from other countries characterized by low wages."

Will things change in the decades to come? Certainly, "the trends that have sustained this kind of globalization are waning," Levinson wrote. It is still too early to tell whether such a change in scenario will lead to structurally higher inflation than in the past.

It should not be forgotten that the European Central Bank expects inflation to be high at 6.8 percent in 2022, but also to decline to 3.5 percent in 2023 and 2.1 percent in 2024. These are much higher levels than in past years, but still not extremely high. Of course, there are still many unknowns about the global geopolitical scenario as to whether or not these projections will need to be revised.