The prices of commodities and the effects of state financial regulation are proof of the world’s increasing interconnectivity. Understanding how it works and how it affects your investments can allow you to prepare accordingly and ensure financial security.
Much of global growth was forecasted to reduce in 2022 due to numerous factors: continued COVID-19 flare-ups, decreased fiscal support from major economies and elevated global inflation.
Global Economic Prospects from the World Bank anticipate trade growth to slow to four percent as the war in Ukraine continues to disrupt international value chains, activity shifts back toward the services sector and international travel gradually moves towards pre-pandemic levels.
For emerging markets and developing economies (EMDEs), they’re also projected to have a slower and weaker recovery than advanced economies, as they’re more vulnerable to COVID variant-driven economic disruptions and natural disasters associated with climate change.
Most, if not all, of these issues are interlinked. The initiatives developed by the international community as well as national policymakers impact the global economy, and how individuals manage their finances on a daily basis (what economists describe as microeconomics).
How the global economy works
The global economy may seem abstract, but at its core it involves the interconnected economic activities between multiple countries.
It’s comprised of multiple characteristics that make commerce possible at this scale:
- Globalisation refers to the process that has integrated countries through the international network of trade, communication, immigration and transportation.
- International trade is the exchange of goods and services between different countries, and it helps countries to specialise in products they have a comparative advantage in.
- International finance is how money moves around faster compared to goods, services and people, thanks to features like currency exchange rates and monetary policy.
- International investment is a kind of investment strategy that only happens through foreign direct investment (FDI) between different countries.
International transactions between major economies in the world drives the global economy. These exchanges encourage market competitiveness in different countries and promote innovation of the products that they have cornered the international market on.
At the same time, international transactions help empower underdeveloped countries as they’re able to more freely import and export their goods.
Since countries are so interconnected in a global economy, it’s nearly impossible to find one unaffected by what’s happening in another country at any point in time.
The production and exchange of goods and services at this scale can potentially disrupt the stability of a country that imposes too many restrictions on these imports (trade tariffs) and exports (trade quotas).
Despite these risks, the global economy still has its own benefits:
- Free trade is a method for countries to exchange goods and services without tariffs, quotas or other restrictions. This allows countries to focus on the production of goods wherein they have a comparative advantage.
- Movement of labour is advantageous for the recipient country and the workers themselves because they are less restricted by geographical boundaries in the event it’s difficult to find jobs in their country.
- Increased economies of scale, achieved by specialised goods production, is related to lower average costs and prices for customers.
- Increased investment is easier with the presence of the global economy, which attracts more short-and long-term investments which go a long way to improve developing markets.
Different factors can affect how well the global economy performs, which can then impact the growth of your own finances.
3 ways the global economy can impact your investments
The global economy affects you aside from changes in the prices of goods. You’re taking on the risk of being affected by international markets whenever you invest, but there are a few specific ways that your personal finances are implicated.
1. Commodity prices are affected by current events
Geopolitical conflicts can impact different sectors on an international scale.
As an example, the war in Ukraine has triggered a supply shock on agricultural produce, driving up the prices for commodities such as wheat and fertiliser. The average price of wheat rose by 88% and fertiliser by 77% in the first quarter of the year, which affects all the other products that need these components to be produced.
The price of metals has also risen sharply, especially ones used in engineering, transport, and building and construction sectors. Due to these increases, supply chains risk getting clogged up further. Energy prices are also spiking, so governments are challenged to be resilient to these changes and exert control over what they can, and keep prices in a reasonable range.
While investment prices have increased, including gold which has also risen by approximately 10%, it is still the most effective commodity investment.
Gold has better long-term returns than other commodities and it has more effective diversification than other commodities, with no correlation to oil over time.
Gold can be a good hedge against inflation, because its value is not based on public trust in it like fiat currency or government-backed legal tender. That stability is part of why many investors rely on it to ensure their savings stay protected in spite of rising prices.
2. Globalisation increases international trade and investment
Globalisation increases accessibility for investors, providing them with investment opportunities in different countries and increased connections in various financial markets. Companies increase their international investment out of mutual interest and the need to stay internationally competitive, so they continue to encourage more capital inflow into the country.
Globalisation also ensures that products and services from one country can readily be launched in another, thanks to the interlinked nature of trade in this process. It’s easier to adjust when there are less restrictions on different businesses as they pivot to scale globally. The developments in international trade and investment also reflect the changes driving the financial services industry today, which is geared towards technological advancement, wider inclusion, and building decentralised financial systems. Globalisation removes many of the barriers for trade, so with the new tools and institutions established in the financial industry.
International transactions and investments are more challenging when there are multiple local banks with separate fees and regulations that need to be worked out, so fintech platforms developed alongside globalisation to cut through all that trouble.
Neobanks are a prime example of how the financial services industry is changing and it’s become a relevant platform due to increased international trade and transactions.
These are digital-first or digital-only banking platforms that deliver a smooth online banking experience for low fees. Neobanks are called “challenger” banks as they cut out the need for physical financial institutions, where the process is typically tiresome and long winded.
With neobanks in particular, international trade and investment is simpler under the globalised process.
3. Economic growth or downturns affect interest rates
Thanks to the interconnected nature of the global economy, it’s affected by decisions made by domestic financial institutions. These play out as controls on interest rates.
Central banks use interest rates to manage inflation and slow down rising prices. Increased interest rates can increase the cost of borrowing as well as mortgage interest repayments, which gives consumers more incentive to save rather than spend their disposable income.
This slows economic activity as people are keeping more of their money in their own pockets (instead of spending it) and they may be less likely to buy products and services from companies. The knock-on effect is bringing down prices and helping stabilise the economy.
Higher interest rates can also discourage firms and consumers to make risky investments and purchases as companies have to spend more on debt, as bank interest rates increase and they have less profit to give to shareholders through a dividend or to invest in future growth.
Due to innovation and globalisation, making an investment anywhere in the world is essentially the same as investing in the global economy and taking on all its risks, so it’s important to understand what that means for your hard-earned savings. Investing in a historical safehaven like gold may be a more stable alternative given all these variables.
Protecting your wealth is simpler now with fintech platforms and it’s up to you how you want to grow your savings.
If you want to learn more about how you can grow your wealth even during uncertain times in the global economy, get in touch with us.