BRUSSELS – The world economy is heading for a potentially bleak period, as rising spending, food and other shortages and Russia’s ongoing invasion of Ukraine threaten to slow economic growth and lead to a painful global downturn.
Two years after the coronavirus pandemic emerged and left much of the globe paralyzed, politicians are grappling with ongoing challenges, including clogged supply chains, blockages in China and the prospect of an energy crisis as nations unlearn Russian Oil and gas . These clashing forces are causing some economists to worry about a global recession as different parts of the world find their economies battered by events.
Finding ways to avoid a global slowdown while continuing to put pressure on Russia for its war in Ukraine will be the main focus of finance ministers from the Group of 7, meeting in Bonn, Germany, this week.
The economic challenges facing governments around the world may begin to be removed from the united front that Western nations have supported in opposing Russian aggression, including broad sanctions aimed at crippling its economy and efforts to reduce dependence on Russia. energy.
Politicians are balancing delicate compromises as they consider how to isolate Russia, support Ukraine and keep their own economies afloat at a time when prices are rising fast and growth is slowing.
Central banks around the world are starting to raise interest rates to help curb rapid inflation, actions that will stifle economic growth by raising borrowing costs and could lead to higher unemployment.
Global growth is expected to slow to 3.6% this year, the International Monetary Fund predicted in April, lower than 4.4%, ahead of Russia’s invasion of Ukraine and China’s zero-Covid blockade.
On Monday, the European Commission released its own revised economic forecast, showing a slowdown in growth to 2.7% this year from 4% estimated in its winter report. At the same time, inflation reached record levels and is expected to average 6.8 percent for the year. Some Eastern European countries expect much sharper increases, with Poland, Estonia, the Czech Republic, Bulgaria and Lithuania facing inflation of more than 11 percent.
Last week, Christine Lagarde, president of the European Central Bank, signaled a possible rise in interest rates in July, the first such move in more than a decade. In a speech in Slovenia, Ms Lagarde compared Europe to a man “who receives blow after blow from fate”.
Eswar Prasad, the former head of China’s branch of the International Monetary Fund, summed up the challenges facing the G-7 countries, saying her “politicians are caught up in the commitment that any tightening of Russia’s screws by limiting Russia’s purchases. energy exacerbates inflation and damages growth in their economies. “
“Such sanctions, for all the moral justification that underpins them, are causing more and more severe economic damage, which in turn could have domestic political consequences for G7 leaders,” he added.
However, the United States is expected to pressure its allies to continue to isolate Russia and provide more economic aid to Ukraine, despite its own economic problems. Officials are also expected to discuss the merits of imposing tariffs on Russian energy exports ahead of the proposed European oil embargo, which the United States fears could lead to a sharp rise in prices by cutting supplies. Politicians will also discuss whether to pressure countries like India to lift restrictions on exports of important food products, which are exacerbating already high prices.
Against this background, there is a growing urgency to help sustain Ukraine’s economy, which the International Monetary Fund says needs about $ 5 billion a month in support to support government operations. The US Congress is close to adopting a $ 40 billion aid package for Ukraine that will cover part of those costs, but Finance Minister Janet L. Yellen has called on her European counterparts to provide more financial assistance.
Finance ministers are expected to consider other measures to provide relief to Ukraine. There is growing interest in the idea of seizing some $ 300 billion in Russian central bank reserves, which the United States and its allies have immobilized, and using that money to help finance Ukraine’s reconstruction. Treasury officials are considering the idea, but are concerned about the legality of such a move and the possibility that it may cast doubt on the United States as a safe place to store assets.
Ahead of this week’s G7 summit, US officials saw Europe’s economic challenges first hand. Speaking at a meeting with senior officials in Warsaw on Monday, Ms Yellen acknowledged that the conflict in Ukraine is affecting Poland’s economy, where officials have raised interest rates sharply to fight inflation. Poland has swallowed more than three million Ukrainian refugees and is facing a halt to gas exports from Russia.
“They have to deal with tighter monetary policy, just like the rest of the world and the United States,” Ms. Yellen told reporters. “At a time when Poland is committed to spending heavily to support its security, this is a difficult act to balance.
The decline may be inevitable in some countries, and economists are considering a number of factors as they assess the likelihood of a recession, including a severe slowdown in China due to Covid’s continued blockades.
The European Commission says in its economic report that the EU is “the first developed economy to strike” because of its proximity to Ukraine and its dependence on Russian energy. At the same time, it has swallowed more than five million refugees in less than three months.
Deutsche Bank analysts said this week that they believe a recession in Europe is unlikely. In contrast, Karl B. Weinberg, chief economist at High Frequency Economics, warned in a note Monday that with falling consumer demand and production, “Germany’s economy is on the verge of recession.” Analysts at Capital Economics predict that Germany, Italy and the UK are likely to face a recession, meaning there is a “reasonable chance” that the wider eurozone will also face one, defined as two consecutive quarters of declining output.
Vicky Redwood, a senior economic adviser at Capital Economics, warned that a more aggressive rise in central bank interest rates could lead to a global contraction.
“If inflation expectations and inflation turn out to be more persistent than we expect, and as a result interest rates need to rise, then it will most likely be a recession,” Ms. Redwood wrote in a note to clients this week.
Bakery in Al Hasaka, Syria. The cessation of wheat exports from Ukraine and Russia is putting food prices on hold and increasing global hunger, especially in Africa and the Middle East. Credit … Diego Ibarra Sanchez for The New York Times
The main culprit is energy prices. In Germany, which is most dependent on Russian fuel among Europe’s major economies, tensions are high in its industrial-heavy business sector, as well as in consumers.
Russian gas supplies “support the competitiveness of our industry,” said Martin Brudermüller, CEO of chemical giant BASF, at the company’s annual general meeting last month.
Calling for a reduction in his dependence, Mr Brudermüller warned, however, that “if Russia’s gas supplies suddenly stop, it will cause irreversible economic damage” and is likely to halt production.
The consequences of the gas embargo have been the subject of heated debate among German economists and politicians, with analyzes ranging from manageable to catastrophic. Energy flow is just one of several supply problems in the industrial sector.
Rising food prices are another issue of concern to finance ministers. The finance ministry is expected to release a report later this week outlining plans by the World Bank and other international financial institutions to tackle food shortages.
The disruption of wheat exports from Ukraine and Russia, which together account for 28% of world exports, along with supply chain disruptions, a severe drought in India that has led to a ban on grain supplies and a blockade of Covid-related China; are causing a spiraling rise in food prices and increasing global hunger, especially in Africa and the Middle East.
The question for both American and European politicians is how to keep jumping prices without sending their economies into recession. The Federal Reserve has begun raising interest rates to curb inflation in the United States, and its chairman, Jerome H. Powell, has acknowledged that cutting prices without seriously harming the economy as a whole will be a challenge.
On Tuesday, Charlie Scharf, CEO of Wells Fargo, said at an event hosted by The Wall Street Journal that “it will be difficult to avoid some kind of recession.”
This mystery explains the European Central Bank’s reluctance to raise interest rates. In the plus column, the European Commission noted that unemployment in the euro area is declining, as well as government deficits, although the costs of the war are rising.
As food prices rise around the world, inflation rates vary widely. Food inflation was 2.5% in France and Ireland in the first three months of 2022 and 10% in Eastern Europe. while in Turkey and Argentina, 60 to 70 percent in March alone, according to an analysis by ING last week.
In a speech to the Brussels Economic Forum on Tuesday, Ms. Yellen said Russia’s actions were a reminder that nations should not trade national security for cheap energy. She claims that it is crucial …
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