In its latest assessment on the global economy released last week, the World Bank predicted that global growth will face a widespread slowdown in 2023 and 2024 compared to last year. Underlining the sharp slowdown in global growth, the report indicated that worldwide economic output is projected to be just 1.7 percent in 2023 before edging up to 2.7 percent in 2024.
The study warned that the downturn would be widespread and could affect 95 percent of advanced economies and nearly 70 percent of emerging markets and developing economies — with the potential for increasing poverty rates in some regions, and the likelihood of the global economy slipping into recession.
Growth in Europe and Central Asia is expected to slow to 0.1 percent in 2023 before increasing to 2.8 percent in 2024, said the report. In the US, growth is expected to hover around 0.5 percent before rebounding to a little over 1.7 percent in 2024. Meanwhile, in the Middle East and North Africa region, growth is expected to slow to 3.5 percent in 2023 and fall further to 2.7 percent in 2024.
In his foreword to the January 2023 edition of ‘Global Economic Prospects’ report, President of the World Bank Group, David Malpass, noted that higher inflation, and interest rates, along with low investment, and disruptions caused by Russia’s invasion of Ukraine, as well as a resurgence of the COVID-19 pandemic, were among reasons behind the report’s downcast forecast.
According to the World Economic Forum, heightened inflation was visible across a broad swathe of countries in 2022. By June, inflation in the United States hit 8.6 percent, a 40-year high, before trending downwards to reach 7.7 percent in November. In the European Union it was 11.1 percent in November, a heady rise from the 5.2 percent a year earlier. International Monetary Fund (IMF) experts forecast global inflation to be around 8.9 percent in 2022 before falling to 6.2 percent in 2023.
In response to elevated inflation, unseen in the developed world since the 1980s, many central banks, including the US Federal Reserve and the European Central Bank, raised their interest rates. These coordinated rate hikes — by 33 out of the 38 central banks tracked by the Bank of International Settlements — were the broadest in over two decades. However, the interest rate hikes, while tempering the inflation surge in many developed countries, also caused adverse economic consequences in many emerging markets and developing countries.
Many of these low-income countries, already struggling to recover from pandemic-period disruptions to their economy, were then further burdened by the high interest rates in developed countries, which caused an outflow of their meager foreign-currency reserves. The dollar-appreciation from US interest hikes also made repayment and servicing of dollar-denominated debts exorbitantly expensive for these nations.
Economists explain that inflation intensified in 2022 largely on account of higher energy and food commodity prices fueled in part by the Russia-Ukraine crisis, which has since triggered price increases across a basket of goods and services. They added that it is not just ‘cost-push’ inflation, such as from current high energy and food prices, but also a simultaneous ‘demand-pull’ inflation, causing price hikes.
The ‘demand-pull’ was triggered following abatement in the COVID-19 crisis, when consumer spending surged on the back of generous stimulus packages provided by many governments during the pandemic period. But, with production cuts and supply-chain bottlenecks limiting the amount of goods available in the aftermath of the pandemic, demand outstripped supply and the typical situation of ‘too many dollars chasing too few goods’ resulted in the prevailing price increases.
With the global economy poised at a tipping point into recession, the blame-game for surging prices and slowing growth is in full swing. Western leaders and politicians have unanimously pointed the finger of blame at Russia’s aggression in Ukraine for the energy and food price hikes. And, many have attributed the global supply-chain bottlenecks that contributed to the cost-of-living crisis, to China’s decision to lockdown its cities to curb the surge of COVID-19 infections there.
On the other hand, several economists contend that it was the prodigious stimulus responses by developed nations, aimed at reviving faltering economies and supporting families that initiated the global inflationary trend. Other experts attribute the global inflation to the West’s continuing unilateral sanctions, export controls and price ceilings imposed on Russian energy supplies, as well as the decision by the Organization of Oil Exporting Countries (OPEC) and their allies in non-OPEC states, to introduce concerted production cuts in order to maintain higher oil and gas prices.
It is indisputable that high energy and food prices were exacerbated by the Russian invasion, and that supply bottlenecks are in part due to Chinese measures to curb the spread of COVID-19. But then, there is also no denying that the overly generous stimulus packages by the United States and others also helped fuel inflation — in particular, the $1.9 trillion American Rescue Plan, passed in March 2021 by US President Joe Biden, and the $4 trillion in emergency COVID Relief approved by his predecessor Donald Trump.
Notwithstanding these accusations, there is no evidence to show that any one of these events on their own was responsible for spurring global inflation. Moreover, data indicators available from the Food and Agriculture Organization and the International Energy Agency clearly show that food and energy prices were already high, and on an upward trajectory, much before the Russian invasion in February of 2022. Similarly, investment growth slowdown was widespread long before COVID-19 emerged.
On a similar exoneration note, in a faltering economy caused by the global pandemic, it was imperative for countries to launch stimulus packages. Also, the trend to curb inflation by raising interest rates has been a characteristic response by most central banks. So the right answer to who, or what caused the current inflation would be, all of the above and none of the above.
In the globalized world we live in, it is just not possible to factually pinpoint to one particular instance or event, or blame one specific country or region, for economic decline and hardships that prevail at any given time. Nevertheless, the blame-game continues unabated. Last week, in a commentary titled ‘Resilient Trade’ published online, US Secretary of the Treasury, Janet Yellen, in her assessment of the global economy, blamed others for the prevailing crises.
Highlighting the importance of developing resilient trade to maintain sustained, robust growth and overcome economic difficulties, she wrote: “Events over the past three years have strained global economies. The COVID-19 pandemic claimed millions of lives and brought the world economy to a standstill. Russia’s brutal war has taken a devastating toll on lives and infrastructure in Ukraine, generating seismic repercussions for oil and food prices.”
Stressing that her country is concerned about vulnerabilities that result from geopolitical and security risks, over-concentration, and violations of human rights, Secretary Yellen added: “We must protect against geopolitical and security risks. Not only is Russia waging a brutal war against the Ukrainian people; it has also weaponized commodity exports against the world. In the first five months following Russia’s invasion of Ukraine, the price of natural gas in Europe jumped by 170 percent. Russia’s destruction of grain storages and blockade of Ukrainian ports have also driven up food costs.”
Implying Chinese policies were to blame for many of the supply-chain bottlenecks, she added, “The US and its partners have a strong interest in creating redundancies in our supply chains. We must avoid over-concentration of the production of critical goods in any particular market. We must also shift away from supply chains that violate core human rights. One area of particular concern is imports from the Xinjiang region in China.”
Emphasizing that the future of resilient trade was in ‘friend-shoring’, Secretary Yellen said that with this approach the US aims to deepen economic integration with a large number of trusted and dependable trading partners. She clarified that friend-shoring is not for a closed group of countries. “It is open and inclusive of our partners in emerging markets and developing countries, in addition to advanced economies.”
Turning to climate change and her country’s planned aggressive domestic action on climate change, she said: “We will also continue to help developing countries move decisively toward more resilient, low-carbon futures. Beyond the effect on the climate, our collective movement away from fossil fuels will also reduce our vulnerability to oil- and gas-price shocks and our exposure to autocratic regimes, which often control much of the world’s reserves of fossil fuels.”
It is only to be expected that the US Treasury Secretary would be interested mainly in ensuring greater stability of the US economy. However, it is dismaying that she did not comment on the global economic crisis, or high inflation — caused in part by the generous COVID-era stimuluses in her country, and the US Federal Reserve’s policy tightening measures — that has caused disruptive repercussions worldwide, negatively affected world trade, and raised the potential of a global recession.
In a more equitable and pragmatic approach to ward off risks of a global recession, the World Bank urged policymakers to ensure that their monetary policies to restore price stability stays the course, despite the difficulties it could entail. The Bank also said the priority of fiscal policies should be to protect vulnerable groups through targeted, temporary support to alleviate the burden of the cost-of-living crisis, while also supporting monetary policy targets.
Concerted efforts and collaboration on a global scale are clearly needed to tackle the various global crises, from climate change to geo-politics, and a potential economic recession. At a time like this, stoking parochialism and divisions along lines of free-market democracies and autocratic regimes, or blaming Middle East fossil fuel suppliers for the woes of the world, is definitely not the ideal approach.
Unlike politicians who make egregious claims to notch brownie points with voters, as a technocrat we would have expected Secretary Yellen to do better. While ‘friend-shoring’ or other policies recommended by her could lead to more robust and dependable supply chains for the US, it could also lead to fragmented world trade and usher in a compartmentalized, less productive, and poorer global economy.