A year ago, talk was how countries around the world were taking their first tentative steps out of the economic turmoil wrought by the Covid-19 pandemic. Visions for the future were brightening, with growth expected around the globe and optimism slowly replacing the pessimism that had previously pervaded. Events, however, rarely take stock of expectations.
The coronavirus restrictions and their repercussions saw the global economy contract by 3.3% in 2020, according to IMF data. Despite supply chain disruptions and other hurdles, it expanded by around 6% in 2021. World Bank estimates at the start of this year had growth anticipated at 4.1%, but by June this had been revised to 2.9%. While the IMF was marginally more optimistic at 3.2%, it sees the number dropping to the same 2.9% next year.
And the reasons? While one might immediately spring to mind, it is not responsible in isolation. The war in Ukraine stands at the head of the list of causes and has undoubtedly led to a jump in energy prices that has had knock-on effects.
The removal of unprecedented levels of accommodative monetary and fiscal policy designed to mitigate the effects of the pandemic and the re-emergence of that very threat and the consequent reintroduction of lockdowns in China have also played their role. But the inflationary seeds planted by the war are impossible to ignore.
The additional pressure rising energy and food prices place on countries that were already struggling with supply chain problems and disruptions to activity, investment and trade cannot be underestimated. But these adversities are even further exacerbated by climate events that appear to be increasingly frequent and serious. Political machinations also sometimes hinder rather than help.
The upshot is a world in which inflationary pressures and constricted growth are in danger of heralding a return to stagflation of the kind seen in the 1970s. The recovery path out of that situation entailed significant interest rate rises in major advanced economies, which, as the World Bank pointed out in its June global economic prospects report, played a prominent role in triggering a string of financial crises in emerging market and developing economies.
This is naturally something it is hoped can be avoided on this occasion, and central banks around the world have undoubtedly become better over the intervening decades at both addressing situations and communicating the strategies they intend to employ. Clear messaging is something that plays an important role domestically and internationally and there is now a greater resolve to be seen to be acting in ways that are inclusive.
It is plain the global economy is not yet out of the woods to the extent that had been hoped at this stage last year. There is, however, a determination to avoid the mistakes of the past and employ the tools of the present to secure a brighter future. A path might just be opening up.
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