Delta variant raises global exposure to ‘political risk’ and economic slowdown, report finds


By Su-Lin TanJi Siqi

The Delta variant of the coronavirus, when factored together with a number of persistent economic issues being seen throughout the world, could lead to both political risks and greater social pressures, a new assessment has found.

Fresh lockdowns, enduring unemployment in a number of countries, and higher commodity prices resulting from fiscal stimulus measures are also working in tandem to weaken purchasing power and living standards, according to a second-quarter economic report card issued by trade credit insurer Coface.

Additionally, Coface’s global social risk index for all of 2020 rose to its highest level since 2010. Despite fiscal and monetary support globally, 140 out of the 160 assessed countries saw their gross domestic product (GDP) decline last year, and 145 countries saw their unemployment rate increase.

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“The annual update of the Coface index shows a sharp rise in political risk around the world,” it said.

Since the Arab spring incidents that began in 2010, Coface had been studying the emergence of popular movements by linking the pressures for change with the instruments that facilitate popular mobilisation.

“The deterioration in living standards and purchasing power, as well as the rise in inequalities observed in the wake of the Covid-19 crisis, make this analysis just as relevant as it was previously,” it said.

“Even if this does not necessarily translate into popular revolt, it remains a sign of increasing social pressures.”

The report added that such increases are most notable in high-income economies, which were traditionally at lower risk of such problems.

“While all regions worldwide are affected by a sharp increase in the social score, Europe and North America are more so. Their scores increased ... due to a decrease in their GDP per capita and an increase in the unemployment rate,” the report said. “Japan, the UK and Singapore are also in a similar situation.”

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While a global economic recovery remains important in curbing political risks and alleviating social pressures, it faces many challenges as both advanced economies and emerging ones are still suffering headwinds.

Vaccine resistance also remains a big concern, particularly in terms of how it could prevent countries from achieving herd immunity, the report added.

And for emerging economies with low vaccination rates, it said the so-called stop-and-go lockdowns due to Delta outbreaks continue to constrain domestic demand.

Infection rates remain high in places such as Brazil, while Indonesia has become the new epicentre of the new Delta variant.

Even if the Delta variant doesn’t derail recoveries, it is becoming increasingly clear that we are likely going to have to learn to live with Covid long-term
Neil Shearing, Capital Economics

“While the economic impact wouldn’t be as bad as in previous waves – businesses and households have adjusted to the virus and social-distancing measures – it would still have damaging repercussions,” Capital Economics’ group chief economist, Neil Shearing, said in a note. “That includes almost all of Africa and parts of Asia and Latin America.”

The global economy is, therefore, poised to take a long and uneven path, Shearing said.

“Stepping back, even if the Delta variant doesn’t derail recoveries, it is becoming increasingly clear that we are likely going to have to learn to live with Covid long-term,” he said, pointing to the possible emergence of new variants and a decline in vaccine efficacy.

However, Coface expects the volume of trade in 2021 to be robust – albeit from a low base of comparison to a weak 2020 – with the biggest benefactors being countries that export commodities such as metals needed in infrastructure projects. But that also means that prices of commodities should remain high for at least the next six months, it said.

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China’s slowing economy is also expected to reduce demand for raw materials, as the country is one of the biggest consumers of commodities. And while this slowdown will mitigate the effects of inflation, it will also hit the economies of big commodity exporters such as countries in Latin America and Africa, Shearing warned.

The United States and European Union, in comparison, are less likely to be affected by a possible slowdown in China’s commodities consumption.

“Concerns about the outlook for China may also cause periodic bouts of market turbulence – both because investors perceive China to be an important source of global demand, and also because major corporations such as Apple and Tesla make a large share of their revenues there,” Shearing added. “But in our view, the slowdown we anticipate in China does not pose a significant threat to the recovery in most economies, including the US and euro zone.”

The weaker growth in China may contribute to a 1 percentage point reduction in full-year global GDP growth next year, Shearing said.

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