The global economy is expected to grow only 3.6% this year, down from IMF’s previous forecast of 4.2% in January. This projection reveals the fragility of economic recovery, especially in view of the negative effect of Russia-Ukraine conflict, COVID-19 Pandemic, increasing food and commodity prices, energy supply disruption, and global climate change, among others. The major factors that contributed to such downgrade are as follows:
Russia-Ukraine Conflict: Energy Shock in Europe
The conflict highlighted the complex relationship among energy, food security, climate change and sustainable development. Europe met a major part of its energy requirements in 2020 from oil and natural gas imported from Russia, and a sudden halt in flow led to an increase in energy prices and inflationary pressure. The increase in energy costs contributed to rampant inflation, prompting central banks to raise rates, raising investor concerns about slowdown in growth.
Inflation Scare
Worsening supply-demand imbalance and increasing commodity prices resulted in a persistently high rate of inflation. This is especially the case in developing countries, where prevalence of poverty is wide and wage growth remains stagnant with limited fiscal support to lessen the impact of higher oil and food prices. Workers seek higher wages to tackle inflation, and preserve their purchasing power, which is resulting in global workforce attrition.
Global Climate Actions Challenged
The Russia-Ukraine conflict unfolded at a time when global CO2 emissions are at a record high, where increasing energy prices continue to affect global efforts to address climate change. Many countries are turning to coal or import of liquefied natural gas as alternative sources. These short-term measures might cause disruption of the Paris climate goals. To complicate matters, the high prices of nickel, platinum etc. could affect the production of electric vehicles.
Is a Recession Looming Ahead?
Strict COVID-19 lockdowns reduced China’s growth prospects, while US Policymakers continue to struggle to contain the four-decade high inflation rate. Europe’s households endure a cost-of-living crisis; and this situation is being amplified in poorer emerging markets. These four different but imposing problems each stalk the global economy as it recovers from the pandemic. Even though the global economic expansion is slowing down, it is unlikely to snowball into a recession as policymakers still have the tools to stimulate if things get worse.
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