Even before the complete withdrawal of Kovid-19, which had a devastating effect on all regions, signs of another epidemic were coming from all over the world. If the health crisis that tested humanity in the twentieth century was a health crisis, the twentieth twentieth is looking at the worst economic collapse since the 2008 global recession. The International Monetary Fund (IMF) predicts that the gross domestic product (GDP) growth rate will fall from 6.1% in 2010 to just 3.2% in 222. They warn that while the growth rate of developed countries will fall from 5.2% (2021) to 2.4% (2022), the current growth rate of 6.8% (2021) in terms of developing economies will fall to 4.4% (2022). Let us examine what are the factors that are holding back the journey of the world economy.
Russia-Ukraine war
Russia’s onslaught on Ukraine comes at a time when all but a few world powers are easing Kovid-related controls and industrial production is beginning to return to a more or less normal level. Western nations have collectively condemned the Putin administration’s attempt to invade and imposed severe economic and social restrictions on Russia. Russia has challenged its sanctions, threatening to cut oil and gas exports to major European countries, including Germany, Italy and Britain, and for hostile countries to impose energy imports in rubles.
The Ukraine war, which has been raging for nearly four months, has presented the world with a long list of inflation, including oil, natural gas, chemical fertilizers, cereals and other food items. According to the World Bank, inflation in the food and energy sector is likely to ease over the next five years, even if it is likely to ease in the coming days. Brent crude oil prices are expected to average $ 100 a barrel in 2022 due to the uncertainties created by the war, according to a World Bank study.
The global phenomenon of inflation
According to the International Monetary Fund (IMF), inflation has been above 5% since the last quarter of 2021 in 15 of the 34 developed countries. For the first time in two decades, inflation in industrialized countries has reached alarming levels. Not only in developed countries, but also in about seventy-five percent of developing countries, inflation has become lingering and worrying. What are the reasons for the high global inflation?
Governments and central banks around the world have been implementing massive financial packages and slashing interest rates in the days leading up to the outbreak of Covid-19 and the paralysis of production and distribution systems. According to the observations of many economists, this is one of the major factors that later led to inflation. The second important factor is the global political uncertainty described earlier and the ensuing energy crisis.
But in addition to all of this, one of the things that has adversely affected both developed and developing countries is the rhythms in the global supply chain caused by the Kovid regulations. Since the global economic landscape is so inextricably intertwined as a result of the influence of neoliberal ideas since the 1980s, even small movements, directly or indirectly, in the global manufacturing and distribution network can have far-reaching effects on the world economy.
Social security schemes In nominal countries, people from the economically and socially backward to the upper middle class are forced to make significant reductions in consumption as inflation reaches unacceptable levels. Decreased demand will lead to a weakening of the manufacturing sector and exacerbate unemployment. Remember that unemployment is also one of the most crucial socio-political issues. The situation in developing countries such as Sri Lanka, Nepal, Laos and Pakistan has been exacerbated by the depreciation of the currency along with the rise in global oil prices and the sharp fall in foreign exchange reserves.
In the absence of a mechanism to deal effectively with the imbalances in the global manufacturing and supply chain through effective policy formulation, many countries, including India, often entrust the task of controlling inflation to their respective central banks. In 2022 alone, forty-five central banks in developed / developing countries raised interest rates in a very short period of time. For example, in March 2022, Argentina raised interest rates by 2.50% to keep pace with inflation above 50%. Subsequently, the rate was hiked again by 2% in May. Brazil has doubled interest rates twice in the same period. The story of industrialized countries is no different.
The Bank of England has raised interest rates by half a percentage point to curb inflation, while the US Federal Reserve has announced a three – and – a – half percent rate hike, including the latest three – quarters increase. While raising interest rates in this way is beneficial to some extent in curbing inflation, in fact all the central banks, including the Reserve Bank of India, are going through a period of deep crisis.
Policy makers have a mission not only to curb inflation but also to ensure economic growth. High interest rates will not only adversely affect the manufacturing and service sectors, but will also lead to a huge increase in the monthly interest repayments of millions of people, thereby reducing the availability of cash flowing into the market.
Developing economies like India, on the one hand, are plagued by high inflation, while on the other hand, dry economic growth and rising unemployment make the management of the economy quite complex and difficult. Economists use the term ‘stagflation’ to describe this condition. It is in this context that the International Monetary Fund expects a sharp decline in the growth rates of almost all developed and developing countries in the coming years.
Will China and India lead the way?
According to the International Monetary Fund, China’s growth rate for 2021 will be 8.1%, but in subsequent years it will fall to 4.4% and 5.1%, respectively. In the case of India, things are a little more optimistic. The Indian economy is projected to grow at 8.9% (2021), 8.2% (2022) and 6.9% (2023). While India and China may be relieved to some extent compared to other developing and developed countries, it is doubtful whether the two countries will have the capacity to energize the world economy.
Many cities in China, including Shanghai and Beijing, which have been hit hard by the Omikron variant, are slowly beginning to come out of months’ tight controls. Goldman Sachs estimates that China’s economy will produce only about 7.1% less than it would without if Kovid-linked restrictions were in place. Therefore, it is practical to expect Asia’s largest economy to return immediately to its heyday.
In the case of India, while it is optimistic that the economy is slowly recovering from the impact of Kovid, inflation, especially food inflation, is a key factor in destabilizing growth. The central government’s move to restrict wheat exports as part of efforts to control the availability of food grains and control prices has led to an increase in the price of wheat internationally. The central bank hiked interest rates by half a percentage point in June to tackle inflation, which is expected to hurt the manufacturing and services sectors. In addition, the continued rise in interest rates by developed countries such as the United States and the United Kingdom could lead to massive outflows of capital from stock markets in countries such as India.
Given the current situation, it cannot be assumed that any one country or one or two countries will work miracles together. As the US and Europe plunge into unprecedented inflation in recent history, the problems in countries such as Asia, Africa and Latin America are becoming more profound and complex. The only viable option is to identify the impending disaster in advance and try to prevent it through concerted and effective discussions and complementary measures. Otherwise, millions of people around the world will be doomed to suffer the consequences.
References
1.World Economic Outlook-April 2022. International Monetary Fund.
https://www.imf.org/en/Publications/WEO/Issues/2022/04/19/world-economic-outlook-april-2022
2. A toxic mix of recession risks hangs over the world economy. The Economist. April (2022).
https://www.economist.com/leaders/2022/04/09/a-toxic-mix-of-recession-risks-hangs-over-the-world-economy
3. Ukraine war will mean high food and energy prices for three years. The Guardian. April (2022).
https://www.theguardian.com/business/2022/apr/26/ukraine-war-food-energy-prices-world-bank
4. Carmen Reinhart& Clemens Graf Von Luckner. The Return of Global Inflation. World Bank Blogs. February (2022).
https://blogs.worldbank.org/voices/return-global-inflation