That the global economy is in turmoil is no news now. What everyone is waiting for is: can things get better before they get worse? So far nobody seems to know, from number crunchers in banks and research institutes to policy makers in governments. The level of uncertainty is so great that no one dares even to guess. Like love, the world economy has never been smooth, weathering one glitch after another. This uneven development was considered normal as it is amenable to the market’s self-corrective mechanism or routine intervention by central banks or government politicians. But this time the disruption has come in the form of turbulence and cannot be considered “normal” by any analysis. It is having such a devastating impact on economies, whether developed, emerging or developing, and on the lives of their people that even considering it the “new normal” makes one shudder.
The US economy has posted two consecutive quarters of negative growth and is technically in recession. The economies of the European Union (EU) are on the verge of officially entering the recessionary phase defined by the same criteria of negative growth, one indicator of which is the Purchasing Managers’ Index (PMI), which at 49.8 percent is already below the growth indicator is at least 50 percent. In China, currently the world’s second largest economy, the Purchasing Managers’ Index (PMI), an indicator that measures manufacturing output, is hovering dangerously low by just over 50 percent, as a PMI below 50 percent indicates negative growth. In Japan, the fifth largest economy, last quarter’s PMI was cut by 10 percent. So, across the global economy there are telltale signs of an incipient recession in key economies that are driving global economic growth. This simultaneous slowdown in growth coupled with rising inflation has raised the red flag of stagnation, a development known as the worst possible situation an economy can face.
It was understandable that some of America’s people who found themselves unemployed in the wake of the Covid-19 pandemic were queuing for grocery boxes during the worst of the pandemic. But it’s hard to believe that middle-class people in Bradford, UK, are now arriving at the food bank in steady streams to collect bundles of products dubbed ‘lifesavers’, which are estimated to have doubled in number compared to the pandemic period (2020-2021). becomes. Of course, Bradford is the country’s fifth most income-deprived city, not typical of Britain as a whole, but the economic hardship people are experiencing is an indication of the chaos that the cost of living in the country has continued to plague the lives of, even after the pandemic crisis has passed people have done.
For low-income people in other developed and emerging countries, daily life can’t be much different. The question many are asking is why is this “cost of living” beast running amok now that the coronavirus has been reined in?
To gain insight into the problem, one could do worse than look at recent developments in inflationary pressures on prices in the global economy. It can be seen that inflation, the main driver of the cost of living, has come in two waves, in quick succession or even overlapping. In order to understand the causes of the timelines of the two waves, they must be viewed from their correct perspective.
The first wave came in almost all countries hit by the pandemic with varying degrees of severity, immediately after the end of the deadly phase (delta variant) of the virus infection in 2021. Flush with stimulus funds injected during the pandemic, both by expansionary monetary policies and fiscal policy, economies were flooded with money. Unemployment fell so rapidly in developed countries like America that wages rose higher to attract workers. It was a classic case of the Philips curve showing an inverse relationship between unemployment and wages (prices) being seen across the economy. Added to the rewarding price spike were supply chain disruptions caused by the pandemic. In a globalized economy, many industries, both in developed and emerging (including developing) countries, depended on imported raw materials and intermediate products from other countries for their manufacturing sector. Deliveries by trade that were disrupted during the pandemic could not be restored immediately after the economic recovery began, and when deliveries resumed, higher rates were charged by the cargo shipowners. As a result, the production costs for almost all traded goods and services rose.
This was the cause of the first wave of inflation. While both wage push (or demand pull) and supply chain push (as costs) contributed to the inflationary situation in developed countries, the latter made the largest contribution in developing countries. To alleviate the inflation problem, developed countries could not do much in the short term (ditto for emerging and developing countries) in terms of supply chain bottlenecks, but they could rein in easy money policies by halting Treasury bill purchases and policy hikes in interest rates below 1.0 percent in the Americas; and negative in the European Union (EU) and Japan for over a decade, since 2008 to be precise.
Developing countries like Bangladesh stopped injecting money into the market once the worst of the pandemic was over. Thus, inflationary inflation could be brought under control in developed countries like America, EU and Japan if their central banks would raise interest rates and halt quantitative easing as soon as inflationary inflation reared its head. But they hesitated and finally plucked up the courage to raise interest rates, which amounted to a paltry rate. 25 (quarter) points. The Fed in America had the courage to raise interest rates by 0.75 points only on July 30, when inflation was already above 9 percent, a 40-year high. The European Central Bank (ECB), more intent on defending the euro against the dollar, hiked interest rates just a day ahead of the Fed. The Bank of Japan (BoJ), on the other hand, which has been plagued by decades of deflation, has kept interest rates in negative territory and is happily continuing with its stimulus packages.
Central banks in developed industrial countries have therefore not played their timely role, for which inflation has intensified and has affected the global economy. For inflation in the developing world, the main cause of which is the costs transmitted through broken supply chains, there has not been much policy space other than reducing import volume through the elimination of non-essential goods and austerity measures. The former has been used in countries like Bangladesh, but austerity is a nut that has always proved difficult to crack. Public sector spending has many interests and, unless closely monitored by political authorities, cannot go beyond window dressing and tokenism. This is not a task that politicians have excelled at.
Before the beast of global inflation could be tamed and leashed, the war in Ukraine gave a bigger boost to its rampage than the pandemic and inflation in America (9.5 percent), Britain (8.6 percent) to a 40-year high ) and EU (7.8 percent) in June. This surge was driven by halts and disruptions in grain, soybean oil, fertilizer and oil and gas exports from Ukraine and Russia, two major suppliers of these products in the world.
All of these are elements that 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 skyrocketed due to soaring oil and gas prices. The rise in crude oil prices has been exacerbated by the imposition of economic sanctions on major oil producing countries such as Venezuela, Iran and now Russia. Thus, oil has been a producers’ market since the mid-1970s, as the cartel they formed (OPEC) keeps production low to drive the price higher than it would if market forces of supply and demand were dictating price. The imposition of sanctions on Russia, the second largest oil and gas producer, has further increased market distortion and exacerbated the price situation.
The second wave of inflation that emerged in Ukraine after the war was solely caused by geopolitical rivalry, led by America, with its allies unknowingly following suit. America is delighted because it has succeeded in uniting its allies against Russia. But as the days go by and the cost of living bites deeper and more viciously, making families everywhere but the top 1.0 percent even more miserable, Cold War-era politics will be seen as the enemy of the people.
The erosion of living standards across the board, again excluding the top 1.0 percent, will cause widespread complaints and consumer dissatisfaction, peaking next winter as the oil and gas embargo continues through sanctions. Anti-government demonstrations will flare up in country after country, crumbling much-vaunted democracy even in developed countries. The united stance of European countries against Russia over its invasion of Ukraine will gradually fray, giving way to the daily urgent economic needs of the public. If the war in Ukraine is not ended by mutual give-and-take negotiations by both parties, a catastrophe will pulverize the world economy like never before. As a man-made crisis, monetary and fiscal policy play no role in containing the tidal wave of economic consequences of the Ukraine war, in particular the sharp increase in the cost of living due to inflationary price increases.
Only a reversal of the suicidal Realpolitik, which thinks only of the spheres of influence of the great powers, can bring the badly battered world economy back to health and initiate the process of normalization.
But hoping to return to the status quo ante is like a will-o’-the-wisp. The global economy will have to reconcile itself to a “new normal” in the truest sense of the word and not as fashionable rhetoric. The more the negotiated solution to the Ukraine war is delayed, the greater the uncomfortable quotient of the “new normal”. If ever there was a reason for “gloomy” economics to prevail over raw politics, it is now.
Source: Financial Express
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