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PHL must prepare for global headwinds | BusinessMirror


The global economy is currently facing a number of headwinds that will likely cause widespread economic growth deceleration. As the supply of natural gas, coal and other energy sources fails to adequately meet global demand, many countries are experiencing severe shortages of electricity. The energy crunch is expected to worsen if a severe winter further boosts energy demand.

From the Associated Press: “Power shortages are turning out streetlights and shutting down factories in China. The poor in Brazil are choosing between paying for food or electricity. German corn and wheat farmers can’t find fertilizer, made using natural gas. And fears are rising that Europe will have to ration electricity if it’s a cold winter. The world is gripped by an energy crunch—a fierce squeeze on some of the key markets for natural gas, oil and other fuels that keep the global economy running and the lights and heat on in homes. Heading into winter, that has meant higher utility bills, more expensive products and growing concern about how energy-consuming Europe and China will recover from the Covid-19 pandemic.”

The rise in energy costs is pushing up inflation. For example, natural gas prices in Europe have soared 600 percent this year. Gas accounts for 40 percent of UK electricity generation, about 25 percent in the European Union, and is also a key fuel for industrial production and heating (80 percent of UK homes). UK’s wholesale electricity prices have already increased by about 300 percent because of the skyrocketing gas prices.

China, the world’s second largest economy, is currently facing a shortage of electricity that is threatening economic recovery. The power crisis in China will have a disruptive impact on global trade. Reports said that suppliers to several major Western technology companies have either stopped or reduced production at certain facilities due to the electricity shortage. Production of semiconductors, which are in short supply globally, has also been further disrupted by the power crisis.

India is likewise suffering from power crunch caused by a shortage of coal. About 66 percent of India’s electricity sources come from coal power plants, and the decline in coal reserves has undermined the stability of the country’s power generation. The global shortage of coal has led to a surge in coal prices. Indian power companies are locked in long-term contracts and cannot easily pass their costs onto customers. Thus, there’s no incentive for them to increase output as they face negative profit margins.

The coal shortage in India comes at a time when the economy is recovering from a pandemic-derailed growth. As producers increase capacity, demand for electricity is rising faster than the ability of the market to supply coal. Unfortunately, alternative sources of power, such as hydroelectric, have been disrupted by inadequate rain during the monsoon season. Thus, India could face the same disruption to industrial activity that is already happening in China.

Governments are scrambling to respond to the power crisis. France and Italy have announced direct subsidies to consumer energy bills, while Spain imposed a windfall tax on energy companies that have benefitted from the price surge. The UK government is considering support for surviving energy suppliers to take on customers of failed suppliers, given that existing fixed tariffs do not cover the cost of supplying new customers.

If China slows down substantially in 2022, its major trading partners like the US, Japan, Korea, Taiwan, Asean, and the European Union will all suffer slower export growth. On Wednesday, the International Monetary Fund cut its growth forecast for the Asia-Pacific region due to a surge of the Delta variant and lagging vaccinations. Covid-related economic slowdown and the adverse effects of the global energy crunch could deal a double whammy to the global economy.

Our policy-makers and economic managers should have contingencies to insulate the Philippines from the effects of global headwinds and to cushion the impact of the global energy crisis on our economy.

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