Home News Financial Times: The danger of stagflation hovers over the world economy

Financial Times: The danger of stagflation hovers over the world economy

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Stagflation is a form of economic crisis, a situation that results from a recession that is reflected in a stagnation of economic activity and the continuation of an inflationary process; consequence of a long inflation which consists in the coexistence of inflation with the stagnation of the economy, through the lack of significant economic growth.

Increasing price pressures, slowing production growth and declining confidence will be an obstacle for most countries, according to the latest Brookings-FT follow-up index.

As a result, decision makers will be left with “pessimistic dilemmas,” said Eswar Prasad, a senior researcher at the Brookings Institution. He expects the IMF to lower its forecast for most countries this week, with finance ministers and central bankers attending spring meetings of the Fund and the World Bank to discuss how to react to the dark economic outlook.

Policy makers need to decide how to deal with the rapid rise in prices and the dangers of rising interest rates when debt levels are already high.

Kristalina Georgieva, the IMF’s chief executive, called the war in Ukraine a “massive setback” for the global economy on Thursday.

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Prasad said there is a risk that 2022 will become “a period full of geopolitical realignments, persistent supply disruptions and volatility in the financial market, all amid rising inflationary pressures and limited policy room.”

Brookings-FT Tracking Index for Global Economy Recovery compares real activity indicators, financial markets and confidence with their historical averages, both for the global economy and for individual countries, capturing the extent to which current data is better or worse than usual.

In the twice-yearly series, the composite index shows a marked loss of growth at the end of 2021 in advanced and emerging economies, with confidence levels falling from peaks and financial market performance declining more recently.

Each of the world’s three largest economic blocs is facing considerable difficulties, Prasad said.

While spending remains strong in the US and the labor market has returned to pre-pandemic conditions, high inflation is causing serious difficulties for the Federal Reserve’s mandate to ensure price stability.

The rate of price growth has accelerated to a 40-year high of 8.5% in March.

“The Fed is at real risk of losing control of the inflation narrative and could be forced to tighten policy even more aggressively than it reported, increasing the risk of a sharp slowdown in economic growth in 2023,” Prasad said.

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China’s problems stem from its desire to maintain its zero-Covid strategy, following an increase in cases of the more infectious variant of the coronavirus, Omicron.

Quarantines, such as severe restrictions in Shanghai, threaten consumer spending, investment and production, while the potential to relax monetary policy again will amplify long-term risks to financial stability.

China is due to report first-quarter gross domestic product figures on Monday, and is expected to show that Beijing is facing a major challenge to meet its 5.5% economic growth target this year.

For Europe, the most exposed to the conflict in Ukraine and struggling to reduce its dependence on Russian energy imports, confidence levels have fallen sharply.

Prasad said there are no easy policy solutions and the willingness to act seems low.

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