That the global economy is in turmoil is no longer news. The question everyone is asking is can it get better before it gets worse. So far, no one seems to know, from bankers and research institute numismaticians to government policy makers. The amount of uncertainty is such that no one can even risk speculation.Like love, the course of the global economy has never been smooth and has weathered one turmoil after another. . This uneven ride is seen as normal and is susceptible to market self-correction mechanisms and routine interventions by central banks and government policy makers. However, this time the turbulence is manifesting itself in the form of turbulence, which cannot be called “normal” by any analysis. The impact on economies, developed, emerging, and developing countries and the lives of their citizens is so severe that the mere thought of it as the ‘new normal’ is horrifying.
The U.S. economy is technically in recession, with two quarters of negative growth in a row. The European Union (EU) economy is officially entering a recession defined by the same criteria of negative growth. One such indicator is the Purchasing Managers Index (PMI), which at 49.8% is already below growth. 50 percent minimum. In China, the world’s second largest economy, the Purchasing Managers’ Index (PMI), an index that measures the output of the manufacturing industry, is hovering above 50%, and falls below 50%. is at a dangerously low level. growth. Japan, the fifth-largest economy, cut 10% from his PMI last quarter. Thus, signs of economic recession can be seen everywhere in the global economy in the major economies that drive global economic growth. Declining growth accompanied by rising inflation raises the red flag of stagnation, known as the worst-case scenario for the economy.
It was understandable that some of the people in America who lost their jobs after the Covid-19 pandemic were lining up for food boxes during the worst of the pandemic. Banks have been steadily streaming in to collect parcels of produce dubbed ‘lifesavers’ and the numbers are estimated to double compared to the pandemic period (2020-2021). While not typical of the UK as a whole, the economic pain people are experiencing shows that the cost of living at home is wreaking havoc on people’s lives even after the pandemic crisis is over. increase.
For low-income people in other developed and emerging economies, everyday life is not much different. Here are the questions many people are asking: Now that the coronavirus is in chains, why is this ‘cost of living’ beast running amok?
It could do worse than look at recent changes in inflationary pressures on prices in the global economy to gain insight into this matter. We can see that inflation, the main driver of the cost of living, rides in two waves, either in rapid succession or on top of each other. To find the cause of the two wave timelines, we need to put them in proper perspective.
The first wave occurred in 2021, shortly after the deadly phase (delta variant) of the virus ended, in almost every country visited by the pandemic, with varying degrees of severity. And fiscal policy, the economy was flooded with money. As unemployment fell rapidly in developed countries like the United States, wages rose to attract labor. This was a typical case of the Phillip curve, which shows the inverse relationship between the unemployment rate and wages (prices), acting on the economy as a whole. In addition to rising prices from wage hikes, there were supply chain disruptions caused by the pandemic. In the globalized economy, many industries in both developed and emerging countries (including developing countries) have relied on raw materials and intermediate goods imported from other countries for their manufacturing sectors. Supplies from trade interrupted during the pandemic could not be restored soon after the economic recovery began, and higher rates were charged by cargo ship owners if supplies resumed. As a result, the cost of production for almost all traded goods and services has risen.
This was the cause of the first wave of inflation. Both factors of higher wages (or attracting demand) and higher supply chains (as costs) contributed to inflationary performance in industrialized countries, while the latter was the major contributor for developing countries. Developed countries could not do much with supply chain bottlenecks in the short term (emerging and developing countries alike) to mitigate the problem of inflation, but treasury bills We were able to curb monetary easing by halting purchases and pulling back on policy. Since 2008 to be precise, it has been below 1.0% in the US and has been in negative territory for over a decade in the European Union (EU) and Japan.
As for developing countries like Bangladesh, the injection of money into the market stopped as soon as the worst phase of the pandemic ended. Therefore, price increases in advanced economies such as the United States, the EU and Japan could be brought under control as soon as they come to mind if central banks raise policy rates and stop quantitative easing. I have. But they hesitated, and when they finally got the courage to raise the policy rate, it was a meager rate of 25 (quarter) points. The US Federal Reserve mustered up the courage to raise interest rates by 0.75 percentage points only on July 30, when inflation was already above his 40-year high of 9%. I was able to. The European Central Bank (ECB) is more focused on defending the euro against the dollar, and the Fed just raised its benchmark rate a day earlier. Meanwhile, the Bank of Japan (BoJ), plagued by decades of deflation, has kept its base rate still in negative territory and has continued to aggressively pursue economic stimulus.
Central banks in industrialized countries have therefore failed to play a timely role in the context of worsening inflation affecting the global economy. Inflation in developing countries, largely driven by costs through disrupted supply chains, has left little room for policy beyond picking essentials and tightening imports through austerity. . The former has been applied in countries like Bangladesh, but austerity has always been a nut that has proven difficult to resolve. You can’t go beyond pretense and figurativeness unless you’re supervised. This is not a job that politicians are good at.
Before the global inflation beast is tamed and hobbled, the war in Ukraine has unleashed a thrust stronger than the pandemic, driving inflation to the highest in the US (9.5%), UK (8.6%) in 40 years. ) and the EU (7.8%) in June. The increase was caused by suspension and disruption of exports of grain, soybean oil, fertilizers, oil and gas from Ukraine and Russia.
All of these are essential to life and economic activity in many countries. A food crisis has already hit countries in Africa and the Middle East, and the cost of living in the UK and her EU has soared due to rising oil and gas prices. Rising oil prices have been exacerbated by economic sanctions against major oil producers such as Venezuela, Iran and now Russia. As it stands, oil has been a producer’s market since the mid-1970s. This is because the cartel formed by them (OPEC) keeps production lower to push prices higher than if the market forces of supply and demand were allowed to dictate. price. The imposition of sanctions against Russia, the second largest producer of oil and gas, has further exacerbated market distortions, exacerbating price conditions.
The second wave of inflation that emerged as a result of the war in Ukraine was entirely driven by the geopolitical confrontation led by the United States, and its allies unwittingly followed suit. The United States is very happy because it succeeded in uniting its allies against Russia. But as the days go by, the cost of living gets deeper and more vicious, families all but the top 1.0% worldwide become more miserable, and Cold War-era politics become seen as the enemy of the people.
The oil and gas embargo due to economic sanctions, if continued, will reach a climax next winter. Anti-government demonstrations will intensify country by country, weakening the vaunted democracies of even the developed world. The united position of the European nations against the Russian aggression in Ukraine will gradually fray, giving back to the urgent daily economic needs of the general public. Unless the war in Ukraine is ended through a give-and-take negotiation on both sides, the global economy will suffer an unprecedented catastrophe. Being a man-made crisis, monetary and fiscal policies have done nothing to stem the economic fallout of the Ukraine war, especially the sharp rise in the cost of living caused by price inflation.
Only a suicidal realpolitical reversal that considers only the sphere of influence of great powers can restore health to a badly wounded global economy and begin the process of normalization.
But wishing to return to the previous state is like chasing will. The global economy must settle in a “new normal” in its truest sense, not as rhetoric of fashion. The longer a negotiated solution to the war in Ukraine is delayed, the greater the proportion of the ‘new normal’ that is inconvenient. If ever “disastrous” economics ever had a chance to win over raw politics, it is now.
Source: Financial Express