War and stagflation threaten global economy as pandemic recovery slows

The twin jeopardy of slowing growth and high inflation, or stagflation, will hit the global economy this year as Russia’s war on Ukraine exacerbates a slowing recovery from the coronavirus pandemic, according to research by the Financial Times.

According to the latest Brookings-FT tracking index, mounting price pressures, slowing production expansion and weakening confidence will hold most countries back.

As a result, policymakers will be left with “grim dilemmas,” said Eswar Prasad, senior fellow at the Brookings Institution.

The IMF is expected to lower its forecasts for most countries this week as finance ministers and central bankers meet at the fund’s and World Bank’s spring meetings to discuss how to respond to the crisis. darkening economic outlook.

Policymakers must determine how to deal with rapidly rising prices and the dangers of rising interest rates when debt levels are already high.

Kristalina Georgieva, managing director of the IMF, on Thursday called the war in Ukraine a “massive setback” for the global economy.

Prasad said there was a risk that 2022 could become “a challenging period of geopolitical realignments, continued supply disruptions and financial market volatility, all against the backdrop of mounting inflationary pressures and limited room for political maneuver”.

the Brookings-FT Tracking Index for the global economic recovery (Tiger) compares indicators of real activity, financial markets and confidence with their historical averages, both for the global economy and for individual countries, capturing the extent to which data from the current period are better or worse than normal.

In the semi-annual series, the composite index shows a marked loss of growth momentum since the end of 2021 in advanced and emerging economies, with confidence levels also falling from their peaks and financial market performance falling more recently.

Each of the world’s three major economic blocs faces significant challenges, Prasad said. While spending remains strong in the United States and the labor market has returned to pre-pandemic conditions, inflation poses serious challenges for the Federal Reserve’s price stability mandate. The pace of price growth hit a 40-year high of 8.5% in March.

“The Fed is at real risk of losing control of the inflation narrative and could be forced to tighten even more aggressively than it has signaled, raising the risk of a marked slowdown in growth in 2023,” Prasad said.

China’s problems stem from its willingness to stick to its zero-Covid strategy after an increase in cases of the more infectious variant of the Omicron coronavirus. Lockdowns, such as the tough restrictions in Shanghai, threaten consumer spending, investment and production, while the possibility of further easing monetary policy will amplify longer-term risks to financial stability.

China is due to release first-quarter gross domestic product figures on Monday and are widely expected to show Beijing faces a tough challenge to meet its 5.5% growth target this year. .

For Europe, the most exposed to the Ukrainian conflict and struggling to reduce its dependence on Russian energy imports, confidence levels have fallen sharply.

Line chart showing that after a strong 2021, financial market indicators have weakened

Prasad said there were no easy political solutions and the will to act seemed scarce.

“Keeping the global economy on a reasonable growth path will require concerted action to address fundamental issues, including measures to limit pandemic-induced disruptions, measures to ease geopolitical tensions, and targeted measures such as spending infrastructure to boost long-term productivity rather than just bolster short-term demand,” he said.

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