The past week has highlighted the scale of the overlapping crises besetting the global economy, intensifying fears of recession, job losses, hunger and falling stock markets.
At the root of this torment is a force so basic that it has almost ceased to be worth mentioning: the pandemic. This strength is far from exhausted, which places policy makers in serious uncertainty. Their policy tools are better suited to more typical downturns, which are not an uncommon combination of slowing economic growth and soaring prices.
Major economies including the United States and France released their latest inflation data, revealing prices for a wide range of goods rose faster in June than at any time in four decades.
These dire numbers have raised the likelihood that central banks will act even more aggressively to raise interest rates to slow rising prices – a move that is set to cost jobs, hurt financial markets and threaten poor countries with debt crises.
On Friday, China announced that its economy, the world’s second-largest, grew just 0.4% from April to June compared with the same period last year. That performance — surprisingly anemic by the standards of decades past — has endangered the prospects of dozens of countries that trade heavily with China, including the United States. This has reinforced the realization that the global economy has lost a vital engine.
The specter of slowing economic growth combined with rising prices has even revived a dreaded word that was a regular part of the vernacular in the 1970s, the last time the world saw similar problems: stagflation.
Most of the challenges tearing the global economy apart have been triggered by the world’s reaction to the spread of COVID-19 and the accompanying economic shock, though they have been compounded by the latest upheaval – the disastrous attack of Russia against Ukraine, which has diminished the supply of food, fertilizer and energy.
“The pandemic itself has disrupted not only the production and transportation of goods, which was the initial front of inflation, but also how and where we work, how and where we educate our children, global migration patterns,” said Julia Coronado, an economist at the University of Texas at Austin, speaking last week at a discussion convened by the Brookings Institution in Washington. “Almost everything in our lives has been disrupted by the pandemic, and then we add to that a war in Ukraine.”
It was the pandemic that prompted governments to impose lockdowns to limit its spread, hampering factories from China to Germany to Mexico. When people confined to the house then ordered record volumes of goods – exercise equipment, kitchen appliances, electronics – which exceeded the capacity to manufacture and ship them, causing the great disruption of the supply chain. supply.
The resulting scarcity of produce pushed prices up. Companies in highly concentrated industries, from meat production to shipping, have exploited their market dominance to rack up record profits.
The pandemic has prompted governments from the United States to Europe to release billions of dollars in emergency spending to limit unemployment and bankruptcy. Many economists now argue they have done too much, boosting purchasing power to the point of fueling inflation, while the Federal Reserve waited too long to raise interest rates.
Now playing catch-up, central banks like the Fed have acted assertively, raising rates at a rapid pace in an attempt to stifle inflation, while stoking fears they could trigger a recession.
Given the hodgepodge of conflicting indicators found in the US economy, the severity of any downturn is difficult to predict. The unemployment rate — 3.6% in June — is at its lowest point in nearly half a century.
But concern over rising prices and the recent slowdown in US consumer spending have heightened fears of a downturn. Last week, the International Monetary Fund cited weaker consumer spending as it cut expectations for economic growth this year in the United States from 2.9% to 2.3%. Avoiding recession will be “increasingly difficult”, the fund warned.
The pandemic is also central to explaining China’s troubling economic slowdown, which will likely prolong shortages of industrial goods while curbing appetite for exports around the world, from auto parts made in Thailand to soybeans harvested in Brazil.
China’s zero COVID policy has been accompanied by Orwellian lockdowns that have limited business and life in general. The government is expressing its determination to maintain the shutdowns, which now affect 247 million people in 31 cities that collectively produce $4.3 trillion in annual economic activity, according to a recent estimate by Nomura, the Japanese securities firm.
But the stamina of Beijing’s stance – its willingness to continue weathering economic damage and public anger – is one of the most important variables in a world brimming with uncertainty.
The Russian offensive in Ukraine has amplified the turmoil. International sanctions have restricted sales of Russia’s huge oil and natural gas stocks in a bid to pressure the country’s strongman, Vladimir Putin, into giving in. The resulting hit to global supply has pushed up energy prices.
The price per barrel of Brent crude oil rose by nearly a third in the first three months after the invasion, although recent weeks have seen a reversal on the assumption that weaker economic growth will translate into a drop in demand.
Germany, Europe’s largest economy, depends on Russia for almost a third of its natural gas. When a major pipeline carrying gas from Russia to Germany cut supply sharply last month, it heightened fears that Berlin could soon ration its energy consumption. This would have a chilling effect on German industry just as it faces supply chain issues and the loss of exports to China.
If Germany lost full access to Russian gas – an imminent possibility – it would almost certainly slide into a recession, economists say. The same fate threatens the continent.
“For Europe, the risk of a recession is real,” Oxford Economics, a British research firm, said in a report last week.
For the European Central Bank – which will gather a lot of apprehension in the markets on Thursday – the prospect of a slowdown further complicates an already heartbreaking set of decisions.
Neither the Fed nor the European Central Bank has a lever to pull that forces Putin to act. Neither has a way to clear the backlog of container ships clogging ports from the United States to Europe to China.
“Everyone is following the economic situation at the moment, including central banks, we don’t have a clear answer on how to handle this situation,” said Kjersti Haugland, chief economist at DNB Markets, a bank in investment in Norway. “You have a lot of things going on at the same time.”
The deepest danger hangs over poor and middle-income countries, especially those grappling with heavy debt burdens, such as Pakistan, Ghana and El Salvador.
As central banks tightened credit in rich countries, they encouraged investors to abandon developing countries, where the risks are greater, to take refuge in solid assets such as US and German government bonds, who are now paying slightly higher interest rates.
This exodus of cash has increased borrowing costs for sub-Saharan African countries to South Asia. Their governments are under pressure to cut spending as they send debt payments to creditors in New York, London and Beijing – even as poverty rises.
Across the world, the number of people considered “acutely food insecure” has more than doubled since the start of the pandemic, from 135 million to 276 million people, the United Nations World Food Program has said. this month.
Among the biggest variables that will determine what comes next is the one that caused all the trouble: the pandemic.
Since the world was first gripped by public health disaster more than two years ago, it’s been a truism that the ultimate threat to the economy is the pandemic itself. Even as policymakers now focus on inflation, malnutrition, recession, and war with no end in sight, this observation still holds true.
“We are still grappling with the pandemic,” said Haugland, the economist at DNB Markets. “We can’t afford to just look away from this risk factor.”
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Post expires at 2:00pm on Friday July 22nd, 2022