The double blow of pandemic and war has caused inflation to surge and growth to slow around the world
Fast forward a few months and the more commonly cited parallel is the 1970s, when the Arab oil embargo helped create a prolonged period of economic hardship. Inflation surged to double-digit rates even as economies around the world stagnated — a painful mix of high prices and low growth known as “stagflation.”
But just as the oil crisis reverberated throughout the global economy in the 1970s, so has the double blow of pandemic and war put unprecedented pressure on the supply of goods and services around the world today. Forecasts are looking chilly. The consensus is now for global economic growth to average only 3.3 per cent this year, down from 4.1 that was expected in January, before the war. Global inflation is forecast at 6.2 per cent, 2.25 percentage points higher than January’s forecast. Similarly, the IMF downgraded their forecast for 143 economies this year — accounting for 86 per cent of global gross domestic product.
Inflation is more muted in Asia than in other countries, but it is edging up following the global surge in food and energy prices. In South Korea, for example, consumer prices hit a 10-year high in March. The European region as a whole is highly vulnerable to disruptions to its energy supply, with 40 per cent of the EU’s gas coming from Russia. Consumer energy prices already surged in March, with business and consumer sentiment taking a plunge. Many experts are warning that an EU ban on Russian gas would trigger one of the deepest recessions of recent decades in Germany and the eurozone.
Germany is among the hardest hit, with its energy-intensive, large manufacturing sector and export-oriented economy. Over the past six months, economists have halved their 2022 economic growth forecast for Germany, while inflation expectations are three times higher. But it is the U.S. that faces “by far greatest risk of dramatic inflation and wage-price spirals,” says Anatole Kaletsky, economist at the investment research company Gavekal. Inflation hit 8.5 per cent in March and investors expect it to rise even higher. The economy contracted unexpectedly in the first quarter, defying predictions.
The health of the labour market affects what policymakers are expected to do about high inflation, which in turn impacts borrowing costs and living standards. By contrast, the European Central Bank has not raised rates in over a decade from its current minus 0.5 per cent despite having similar headline inflation rates to the U.K. and the U.S., which is also the highest in the history of the currency union.
Back then, inflation rose to double-digit rates for almost a decade, following a large spike in oil prices after the Arab oil-exporting countries stopped exporting to many western countries as punishment for providing aid to Israel during the Yom Kippur war.
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