Introduction: For this week’s look at the Day After, our articles are divided into two topics. The first topic, explored in our first article, is a global economic slowdown in which inflation and the pandemic’s aftereffects have worn on economic growth, risking stagflation. Our second article zooms in on China, highlighting how the country’s aggressive anti-Covid measures have harmed its output, a fact senior CCP leadership seems to willfully ignore. From there, we shift focus to our second topic, the European energy situation, beginning with an examination of the overlap between security and energy concerns. This launches into a discussion of a total boycott of Russian gas in the bloc, its ramifications and what Europe must do to prepare for such a contingency. As these destabilizing pressures continue to mount, we are reminded of refiner’s fire, and the pain from which all worthwhile things are born. That is the essence of the Day After – though trials come today, there is hope for a better tomorrow, not in spite of, but rather through the difficulty.

The Global Stagflation Shock of 2022: How Bad Could It Get?

Valentina Romei and Alan Smith, Financial Times

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The rapid surge of inflation to double-digit annual increases has many comparing the present situation to the destructive stagflation of the 1970’s. While the woes of that period are still far off – today’s inflation is tamer than that of the 70’s, and financial barriers are stronger – the double shock of pandemic-induced supply shortages and Russia’s war in Ukraine has exacerbated inflation and limited economic growth. If these pressures are not transitory, the risk of stagflation presents a significant danger to global prosperity, mainly due to the difficulty of combating it (even under the legendary Paul Volcker, it took a severe recession to rein in inflation enough to permit normal growth). This round of stagflation is also global – Asia is suffering from China’s draconian zero-Covid policies, Latin America is hampered by aggressive tightening, Europe is home to a war involving a leading energy exporter, and the Middle East and Africa are struggling to keep up with rapidly rising food prices. In Europe especially, the energy crisis risks catapulting the region into recession even as it tries to wean itself off Russian oil and gas. The US is in the initial rotations of a wage-price spiral even as labor markets run red-hot, with 5M more vacancies than unemployed workers. Still, the pressures currently increasing inflation and depressing growth are less systematic threats than destructive abnormalities. The world is less reliant on fossil fuels for energy, many households have a backstop of pandemic-grown savings, and central banks are more independent – all of these harden the economy. Still, if the wage-price spiral worsens, the ramifications (especially on the lower rungs of the income ladder) will be severe. The Fed has signaled that it will continue raising rates to combat inflation – it must continue to act with the utmost care if it is to succeed.

China Plans Reprieve for Tech Giants, Including Delaying New Rules, as Economy Slows

Keith Zhai, Wall Street Journal

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As China’s economic growth is hampered by its zero-Covid policies and ensuing lockdowns, the government is easing up on its monthslong regulatory crackdown on Chinese technology companies. The Cyberspace Administration of China will be meeting with the country’s embattled tech giants and is reportedly planning to hold off on new rules restricting the amount of time young people spend on mobile apps as it acknowledges the major toll regulations have had on the private tech sector. On the other hand, some sources say Beijing is also considering pressuring some of the largest tech companies to offer 1% equity stakes to the government and giving it a direct role in corporate decision-making. Over the last year, new rules and regulatory uncertainty have triggered stock selloffs and job layoffs across the Chinese tech sector. However, as growth forecasts for China are being downgraded, Beijing seems to be signaling a relaxation of its crackdown on the tech sector in order to foster economic stability. In a meeting of the Politburo, China’ top decision-making body, President Xi Jinping and other senior Chinese Communist Party (CCP) officials said they would complete their campaign against tech companies, but they did not give a concrete timeline and they said oversight would “support the healthy development of the firms.” The Politburo is set on achieving its target GDP growth rate of 5.5% this year despite increased economic pressures and risks from Covid-19 and the Ukraine crisis. President Xi has also called for the country to go “all out” in building infrastructure – “a tried-and-true stimulus option” for China. The consensus analysis from economists outside of China is that it would be very difficult, if not impossible, for the Chinese economy to meet the 5.5% growth target under current circumstances. According to The Journal, President Xi told officials to make sure China’s economic growth outpaces the US this year.

Decarbonization is Now a Strategic Imperative

Josep Borrell and Werner Hoyer, Project Syndicate

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As Russia has leaned on its energy exports as a tool of influence in Europe, the EU has responded by distancing itself from Russian energy and turning to renewable sources of energy. This work has moved the Commission towards its dual goals of energy independence and the green transition. However, many of the renewable projects have long lead times, which has required stopgap investment in conventional energy (especially natural gas). This risks locking the EU into different long-term dependence of the kind Russia has been exploiting; thus, European officials must strive to avoid becoming overly dependent on one source of energy. This logic applies to renewable as much as conventional energy, as many of the raw materials needed for renewable energy come from only a few countries, a number of which chafe at the liberal Western order. To ensure Europe’s energy independence, its officials will need to carefully cultivate relationships with key suppliers, creating mutually beneficial partnerships to ensure its security while obtaining access to key resources. In so doing, Europe can meet its security and energy goals simultaneously.

Can Europe Weather Looming Gas Shortages?

Karsten Neuhoff and Isabella M. Weber, Project Syndicate

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Plenty of policymakers, economists, and even your average European citizen have been debating whether Europe could manage without Russian gas, and what the consequences of a Russian gas stoppage would be. However, as Karsten Neuhoff and Isabella M. Weber argue in this article, not enough time has been spent on how to prepare for gas shortages if Russia decides to completely cut off the European Union (EU). All of Europe’s other gas providers are already working at full capacity, and Russian gas deliveries account for 40% of EU supply. You do not have to be an expert to conclude that EU gas consumption would have to be rapidly and significantly reduced if Russia were to close the taps. To prepare for such a possibility, which seems to be becoming more likely by the day, consumption needs to be reduced now and the EU needs to create a contingency plan – now. In this article, Neuhoff and Weber note that there are three primary mechanisms that can facilitate reduced consumption: high prices, government programs, and mandatory rationing. Because gas prices are already at record highs and rationing should be a last resort, they argue government initiatives should be the main focus. The EU currently has emergency directives in place for electricity supply and infrastructure, but these directives would only be helpful in the case of short-term interruptions and not a months-long suspension of Russian gas deliveries. To offset shortages, residential consumers and industry users will need to contribute to gas savings. So that the burden is distributed equitably among EU member states and consumers, and to avoid disorder, policymakers should negotiate and create clear targets immediately. The current focus on economic forecasting is “analogous to forecasting the extent of damage a hurricane will cause, instead of actually preparing for the storm.” It is time to focus on disaster preparation.