The twin threats of slowing growth and high inflation, or stagflation, will hit the global economy this year as Russia’s war in Ukraine exacerbates a slowing recovery from the coronavirus pandemic, according to research by the Financial Times.
Increasing price pressures, slowing output expansion and weakening confidence will weigh on most countries, according to the latest Brookings-FT tracking index.
As a result, policymakers are left with “grim predicaments,” said Eswar Prasad, a senior fellow at the Brookings Institution.
The IMF is expected to downgrade its forecasts for most countries this week as finance ministers and central bankers meet at the fund’s and World Bank’s spring meetings to discuss how to respond to the gloomier economic outlook.
Policymakers must consider how to deal with rapidly rising prices and the dangers of rising interest rates when debt levels are already high.
Kristalina Georgieva, Managing Director of the IMF, described the war in Ukraine on Thursday as a “massive setback” for the global economy.
Prasad said there is a risk that 2022 could be “a difficult period of geopolitical realignment, prolonged supply disruptions and financial market volatility, all against a backdrop of rising inflationary pressures and limited room for policy maneuvering.”
The Brookings-FT Tracking Index for the Global Economic Recovery (Tiger) compares indicators of real activity, financial markets and confidence to their historical averages, for both the global economy and individual countries, and captures how far the data is improving over the current period are or worse than normal.
In the bi-annual series, the composite index shows a significant slowdown in growth momentum in both developed and emerging markets since late 2021, with confidence levels also falling from their highs and financial market performance having suffered a more recent slump.
Each of the world’s three major economic blocs is facing significant difficulties, Prasad said. While US spending remains high and the labor market has returned to pre-pandemic conditions, inflation is posing serious challenges to the US Federal Reserve’s price stability mandate. The pace of price growth rose to a 40-year high of 8.5 percent in March.
“The Fed is at risk of losing control of the inflation narrative and may be forced to tighten even more aggressively than it has signaled, raising the risk of a significant slowdown in growth in 2023,” Prasad said.
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China’s troubles stem from its desire to stick to its zero-Covid strategy following a surge in cases of the more contagious Omicron variant of the coronavirus. Lockdowns, such as the severe restrictions in Shanghai, are threatening consumer spending, investment and production, while the possibility of renewed monetary easing will compound longer-term risks to financial stability.
China is expected to release first-quarter gross domestic product figures on Monday, and they are widely expected to show Beijing faces a major challenge in meeting its 5.5 percent growth target later this year.
Confidence has plummeted for Europe, which is hardest hit by the Ukraine conflict and is struggling to reduce its dependence on Russian energy imports.
Prasad said there are no easy political solutions and there seems to be little willingness to act.
“Keeping the global economy on a sensible growth trajectory will require concerted action to address the root problems, including measures to limit pandemic-related disruption, steps to reduce geopolitical tensions, and targeted measures such as infrastructure spending to boost long-term productivity, rather than bolster it.” just short-term demand,” he said.