That the global economy is in turmoil is no longer news. What everyone is waiting to hear is: can it get better before it gets worse? At present, no one, from number crunchers in banks and research organizations to policy makers in governments, seems to know. The magnitude of the uncertainty is such that no one is even likely to guess. Like love, the course of the global economy has never been smooth, experiencing one disruption after another. This uneven pattern has been considered normal, as it lends itself to the market’s self-correcting mechanism or routine intervention by central banks or government policymakers. But this time, the disturbance appeared in the form of turbulence and neither analysis can be considered “normal”. It is so severe in its impact on developed, emerging and developing economies, and the lives of their peoples, that one shudders even to think of it as a “new normal”.
The US economy has posted negative growth for two consecutive quarters and is technically in recession. The economies of the European Union (EU) are about to officially enter the recession phase, defined by the same criteria of negative growth, one of the indicators of which is the Purchasing Managers’ Index (PMI ) which, at 49.8%, is already below the growth indicating minimum of 50 percent. .In China, the world’s second largest economy at present, the Purchasing Managers’ Index (PMI), an indicator by which manufacturing output is measured, is hovering just above 50%, dangerously low because a PMI less than 50% indicates a negative value. growth. In Japan, the fifth largest economy, 10% was cut from last quarter’s PMI. So, all around the global economy, there are telltale signs of a recession taking hold in major economies that are driving global economic growth. This concomitant decline in growth and rising inflation raised the red flag of stagnation, a development known as the worst possible situation an economy could experience.
It was understandable that some of the people in America who found themselves unemployed after the Covid-19 pandemic lined up for boxes of food in the worst time of the pandemic. But it beggars belief that middle-class people in Bradford, UK, are now arriving at a food bank in steady stream to collect parcels of estimated ‘life-saving’ products. twice as much compared to the pandemic period (2020-2021). Of course, Bradford being the fifth most deprived city in the country is not typical of Britain as a whole, but the economic distress that people experience is indicative of the havoc wreaked on people’s lives by the cost of living in the country even after the pandemic crisis was over.
For low-income people in other developed and emerging countries, daily life cannot be much different. The question many are asking is: why is this ‘cost of living’ beast running amok now when the corona virus has been put on a leash?
To get a sense of the problem, one could do worse than look at the evolution of inflationary price pressures in the global economy in the recent past. It can be seen that inflation, the main driver of the cost of living, occurred in two waves, following each other quickly or even overlapping. To trace the causes of the timelines of the two waves, these must be seen from their own perspectives.
The first wave occurred, in almost all countries visited by the pandemic with varying severity, immediately after the end of the deadly phase (Delta variant) of the virus infection in 2021. and fiscal policies, economies were awash with ‘silver. Unemployment has fallen so rapidly in developed countries like America that wages have risen to attract labor. It was a classic case where the Philip curve, showing an inverse relationship between unemployment and wages (prices), could be seen in play throughout the economy. Added to the rising prices that have pushed up wages are the disruptions to supply chains caused by the pandemic. In a globalized economy, many industries, both in developed and emerging countries (including developing ones), depended on raw materials and intermediate goods imported from other countries for their manufacturing sector. Supplies through trade, interrupted during the pandemic, could not be restored immediately after the start of the economic recovery and, when supplies resumed, higher rates were charged by freight shipowners. As a result, the cost of production has increased for almost all traded goods and services.
This was the cause of the first wave of inflation. While wage (or demand) and supply chain (as costs) push factors have contributed to the inflationary situation in industrialized countries, for developing countries it is the latter which have made the main contribution. To alleviate the inflation problem, there is not much that developed countries could do about short-term supply chain bottlenecks (same for emerging and developing countries) but they could rein in the easy money policy by stopping the buying of Treasuries and raising the policy to rates that have been below 1.0% in America and in negative territory in the European Union (EU) and Japan for more a decade, since 2008 to be precise.
As for developing countries like Bangladesh, the injection of money into the market was cut off as soon as the worst phase of the pandemic ended. Thus, rising price inflation in developed countries like America, EU, Japan could be brought under control if their central banks raise policy rates and stop quantitative easing as soon as rising price inflation goes up its head. But they hesitated and when they finally gathered the courage to raise the key rate, it was at a derisory pace. 25 (quarter) points. The US Fed could only muster the courage to raise the rate by 0.75 points on July 30, when inflation was already above 9%, a 40-year high. The European Central Bank (ECB), more concerned with defending the euro against the dollar, only raised its key rate a day before the Fed. The Bank of Japan (BoJ), meanwhile, haunted by decades-long deflation, has kept the base rate still in negative territory and is blithely pursuing its stimulus plans.
The central banks of developed industrial countries have therefore not played their timely role for which inflation has been exacerbated, affecting the global economy. For inflation in developing countries, with the main cause being the costs transmitted through disrupted supply chains, there has not been much policy room except for the import volume crunch in eliminating non-essentials and through fiscal austerity. The former has been applied in countries like Bangladesh, but austerity is a nut that has always proven difficult to crack. Public sector spending has many vested interests, and unless closely monitored by political authorities, cannot go beyond window dressing and tokenism. This is not a task where politicians have excelled.
Before the global inflation beast could be tamed and put on a leash, the war in Ukraine unleashed a more powerful push on its rampage than the pandemic, sending inflation soaring to 40 in America (9.5% ), in the United Kingdom (8.6%). ) and EU (7.8 percent) in June. This increase has been caused by the stoppage and disruption of exports of grain, soybean oil, fertilizers and oil and gas from Ukraine and Russia, two main suppliers of these products in the world. world.
All of these are vital to the life and economic activities of many countries. The food crisis has already hit countries in Africa and the Middle East while the cost of living in the UK and EU has soared due to rising oil and gas prices. The increase in the price of crude oil has been exacerbated by the imposition of economic sanctions on major oil-producing countries like Venezuela, Iran and now Russia. As it is, oil has been a producer’s market since the mid-1970s due to the (OPEC) cartel formed by them keeping production low to push prices higher than it would be. case if the market forces of demand and supply were allowed to determine the price. The imposition of sanctions on Russia, the second largest oil and gas producer, further aggravated the market distortion, worsening the price situation.
The second wave of inflation that emerged as a result of the war in Ukraine was entirely caused by the geopolitical rivalry led by America, followed unwittingly by its allies. America feels very gratified because it succeeded in uniting its allies against Russia. But as the days pass and the cost of living becomes deeper and more vicious, making families around the world more miserable except for the top 1.0%, the politics of l cold war era will be seen as the enemy of the people.
The erosion of living standards in all areas, again except the top 1.0%, will cause widespread consumer grievances and discontent, reaching a fever pitch next winter if the embargo on oil and gas through sanctions continues. Anti-government protests will erupt in country after country, undermining much-vaunted democracy even in developed countries. The united stance of European countries against Russia for its invasion of Ukraine will gradually unravel, taking precedence over the daily pressing economic necessities of the general public. If the war in Ukraine does not end with the negotiation between the two parties through mutual concessions, a catastrophe will pulverize the world economy, as has never been seen before. As this is a man-made crisis, monetary or fiscal policies have no role to play in stemming the tide of the economic consequences of the war in Ukraine, in particular the sharp rise in the cost of living due to the inflationary rise in prices.
Only a reversal of the suicidal realpolitik, which thinks only of the spheres of influence of the great powers, can restore health to the badly battered world economy and begin the process of normalization.
But hoping to return to the status quo ante will be like chasing the wisp. The global economy will have to settle down with a “new normal” in the truest sense of the term and not as a rhetorical buzzword. The longer the negotiated settlement of the war in Ukraine is delayed, the greater the inconvenience quotient of the “new normal” will be. If ever there was an opportunity for “gloomy” economics to trump raw politics, it’s now.
Source: Financial Express