Rising commodity prices, sweeping financial sanctions and the possibility of a ban on energy imports from Russia after invading Ukraine threaten to cause the weakened world economy still from the corona plague to falter even more. They also complicate the task of central banks preparing to stop distributing aid to citizens.
On both sides of the Atlantic, inflation has reached levels not seen in decades, and is rising. Global stock markets are weakening and the dollar is strengthening against foreign currencies as investors flock to the security offered by US assets.
Economists are increasingly warning of the possibility of stagnation, especially in Europe, a situation where there is high inflation and slow growth that hit most economies in the 1970s. At the time, central banks responded to rising oil prices with a light money policy that caused wages and prices to spin. Now, some central banks may give up plans to raise interest rates after leaving it low during the plague.
“It’s going to be harder and harder to ignore comparisons to the ’70s as the price action in the commodity market is increasingly similar,” said Jim Reid, strategy director at Deutsche Bank.
At next week’s interest rate fixing meetings, the European Central Bank and the Federal Reserve were until recently expected to move quickly to a break in the easy money policy. Now, the two big banks are expected to be more cautious, investors said, and reflect the new risks to the economy.
“We need to be vigilant when we make decisions in an environment that is not simple”
Federal Reserve Chairman Jerome Powell told congressional officials last week that the Russian invasion of Ukraine would likely raise inflation, and said he would propose raising the interest rate by a quarter of a percent at next week’s meeting. In this statement he actually ended the speculation about a larger increase of half a percent. “We need to be vigilant and flexible when making decisions in an environment that is obviously not straightforward,” Powell said.
In Frankfurt, European Central Bank officials said they would be cautious as they convened on Wednesdays and Thursdays, despite inflation rising 5.8% in February, almost three times the European Central Bank’s target of 2%. Investors now expect the bank to raise its key interest rate by 0.1% by December, to minus 0.4%, and not by half a percent as expected last month, according to prices in the financial markets.
At the heart of the latest uncertainty is Russia, the 11th largest economy in the world and a vital energy supplier to many European countries. Western countries have in recent days imposed their most sweeping economic sanctions against a major country in recent decades.
Christopher Smart, former Special Assistant to President Barack Obama on behalf of the Treasury Department and the National Security Council, said the uncertainty among global companies was similar to the sentiments that accompanied the collapse of the Lyman brothers in September 2008. “We have never seen anything so comprehensive, so powerful At this size and in this importance to the world economy, “Smart said.
It is similar to the Leman brothers’ crisis “in that there is going to be a lot of uncertainty about who has exposure to Russia, indirect exposure,” he said. “I may know I’m not exposed, but I’m not sure who among my clients might be exposed, who has investments they are going to need to … delete.”
Even before the conflict in Ukraine, Europe’s economic recovery had less momentum
Europe, in its geographical proximity to the conflict and its great dependence on Russian energy, could face its third recession in two years. The US economy will probably do better given that it is the largest oil producer in the world and American households still have considerable savings, but even in the US, rising inflation is likely to hurt consumer spending and growth.
The euro fell to $ 1.08, close to a five-year low against the dollar. MSCI EMU IndexWhich measures large and medium-sized shares in the eurozone, has fallen by about 20% since January, compared with a 10% drop in the S&P 500 index.
Even before the conflict in Ukraine, Europe’s economic recovery had less momentum than in the United States, in part because government spending was lower. According to data from the European Central Bank.
Large emerging market economies like Egypt are facing a crisis in food security due to rising prices and reduced supplies of wheat and sunflower oil from Russia, according to the Middle East Institute, a research institute from Washington.
Italian Prime Minister: “These events will clearly affect economic growth”
In Russia, economists predict that the economy will shrink by 10%, something the country has not experienced since the great economic changes of the 1990s. The initial shock is likely to precede a prolonged period of low growth or stagnation as Russia is pushed into economic isolation, according to Capital Economics.
In China, where leaders are gathering to set economic priorities for the coming year, growth is slowing and high energy costs are a growing concern. The state is still implementing zero-corona policies, and household consumption has been weak, while policymakers are taking punitive measures against housing market exaggerations. President Xi Jinping said on Sunday that the country must ensure certainty in the grain and rely on the local market to maintain production, national broadcasting company CCTV reported.
The war in Ukraine could reduce growth in the eurozone by up to 2%, according to Capital Economics. Western sanctions on Russian businesses, companies that voluntarily sever ties and the deep recession in Russia will sharply reduce exports from the eurozone to Russia.
The conflict is putting new tension on the world’s supply chains and raising prices for European export-focused manufacturing companies. Car companies are taking production breaks due to a shortage of components manufactured in Ukraine and Russia. The war also exerts a weight on household spending through higher prices and uncertainty.
The consequences of the conflict in Ukraine will affect growth in Italy in 2022, Prime Minister Mario Draghi told reporters on Monday. “These events will clearly affect economic growth this year,” Dargi said after a meeting with European Council President Ursula von der Leiden in Brussels.
Mario Draghi / Photo: Shutterstock, Alexandros Michailidis
While the European Central Bank may decide to delay raising interest rates until 2023 and extend its bond purchase program, the Federal Reserve, the Bank of England and the Bank of Canada are likely to move up interest rates, albeit at a slower pace than before the war, said Ian Steele, director Portfolio with GP Morgan’s Asset Management Company in London.
An index that many follow and quantifies investor confidence in the eurozone fell in March to a 17-month low, parallel to the decline that was at the beginning of the corona plague in March 2020.
“We think higher commodity prices are here to stay and will lead to both higher inflation and lower growth,” said Salman Ahmed, global director of macro-assets and strategic assets at Fidelity International in London.
“This means that the risk of a real recession in Europe is rising sharply, especially if the flow of goods from Russia is significantly disrupted in the coming days and weeks.”