Which way the world economy is heading | By Rashid A Mughal

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Which way the world economy is heading

NEVER has the world economy been so uncertain, topsy-turvy, unpredictable and on a rollercoaster ride as we are witnessing today.

The Covid-19 effects, which have brought the global economy to this stage, seem to be long lasting and have perhaps created a “new normal” for all the countries, rich or poor and developed or undeveloped.

It seems the world economy is in free fall. Top economists and bankers of world are talking of recession, stagflation and unending inflation and predicting rough and tough days ahead.

The global economic outlook panel discussion on 23 May 2022 at Swiss resort of Davos opened with one question on everyone’s lips: Are we heading for a global recession and if so, how concerned should we be?

Inflation is rising and the prospect of cost of living crisis loom for many people across the world.

April saw a CPI (consumer price index) increase of 8.3%, while US inflation stayed at a 40-year high.

Driven by food and energy costs in the wake of the COVID-19 pandemic, inflation has been exacerbated by the Russian invasion of Ukraine.

The monthly food price index from the UN’s Food and Agriculture Organization (FAO), which tracks prices of globally-traded food commodities, reported an increase of 12.6% between February and March to reach the highest level since its inception in 1990.

The FAO’s cereal price index rose by an even greater amount – 17.9% – over the period, reflecting a surge in global prices of wheat and coarse grains, largely due to export disruptions from Ukraine, one of the world’s largest wheat exporters.

Vladimir Putin’s invasion of Ukraine has also caused oil prices – that were already high due to pent-up consumer demand post-COVID – to soar over $110 a barrel, as many western countries imposed crippling sanctions on Russia in retaliation.

UK inflation reached a new four-decade high in May with increases in prices for a broad range of goods, from fuel to food and beverages.

The Office for National Statistics (ONS) reported a year-on-year rise in its consumer price index of 9.1%, up from 9% in April.

It means the figure has reached its highest since March 1982, when it hit 10.2%, reported the BBC.

The prices of goods leaving factories rose at their fastest rate in nearly half a century in May, ONS Chief Economist Grant Fitzner said.

The current spike in inflation is described by UBS Economist, Paul Donovan as “historical”, but he says it won’t last at these levels for much longer.

It has been provoked by the extraordinary demand for goods in 2021 as countries emerged from lockdowns, shops re-opened and people were able to go out and buy stuff with money saved during weeks of economic inactivity.

“We got this extraordinary surge in demand for goods and that has pushed off inflation, because we did actually also see an extraordinary surge in supply of goods.

But the demand for goods was so unusual it overwhelmed supply and when demand is greater than supply, you either get shortages or you get price increases.

What we had was a mixture of both, but some of that surge in demand pushed up prices.

Now, that has started to fade because, of course, by end of last year in a number of countries, consumers’ stock of savings had disappeared so demand was coming down.

“We’ve still got some of that inflation pressure there but it’s on its way out. If you look, for example, at television prices in the US or elsewhere, they were rising last year and are now falling, they’ve now actually got negative inflation.

So we’ve started to see a correction, but there’s still enough of its lingering effects that is adding to inflation.

” The demand-driven inflation was starting to fade, until the war in Ukraine wreaked economic havoc.

“ There’s all sorts of humanitarian consequences (of the war), which are very tragic, but there’s also an economic consequence and that is that although Russia is not actually that significant as an economy, it’s significant in commodities, says Paul Donovan.

The price of a barrel of crude oil has consequences for things like food, airfares, petrol etc – because all of these are reliant on fuel.

In a developed economy, only about 15-20% of what we spend on food is actually going on food.

Most of what we spend is going on labour, which is delivering and processing, retailing and advertising.

All of that comes out of what we spend on our loaf of bread; the farmer doesn’t actually get that much.

Prices of oil and gas increased sharply, with both major oil benchmarks trading at above $110, what represents further 15% increase over last week.

Currently, energy exports are not subject to sanctions on Russia. Europe is seeking alternatives, with reports suggesting that refiners should avoid taking Russian oil supplies.

At the same time Russia is still able to find a market for the majority of its production by offering discounts in the order of $15-20.

Clearly, the war in Ukraine continues to increase pressure in the system. Some analysts say that the risk of disruption to supplies has not yet been fully priced in and we may be poised for further run upwards.

On the other hand, OECD countries are releasing 60 million barrels of oil – an equivalent of 12 days of Russian exports – from their strategic reserves to the market.

The move is aimed to ease the price pressure, however as history shows such actions have only short-lived and have limited impact on prices.

What is released today will need to be replenished in near future. Strong economic recovery coupled with low investment in oil production were hugely exacerbated by the Russian invasion of Ukraine.

This sent the oil price to stratospheric levels and this is being passed over to consumers at the pump.

It is hard to predict which way the situation and markets will go, however, it seems that we are poised for a period of high energy prices that are driven by war and combined with tight market fundamentals.

High prices are being passed over to consumers at the pump, in their gas, heating and electricity bills.

And high energy prices contribute to increased cost of virtually all goods and services further fuelling inflation expectations.

Some governments may introduce measures to cushion consumers from this increase. In many countries taxes on diesel and gasoline represent more than half of the price paid by consumers at the pump, so clearly there is a space for government action.

However, all of this cost will need to be paid by consumers.

Unfortunately it seems that we are in for a prolonged period of expensive energy which is fuelling food prices and other commodities of daily use. Inflation has come to stay and stay for long, as it seems.

—The writer is on the panel of Migration Policy Institute, Washington and Migration Source, Europe, presently living in US.

 

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