Once again, inflation numbers are governing the economic headlines. Inflation in the US rose to 8.5% in March – the highest rate in 40 years. In the UK, inflation reached 7%, as opposed to the expected 6.7%. Mainland Europe is not doing too well either, with inflation figures standing at an average of 7.5% in. Geopolitical tensions have caused higher energy and food prices, which are among the biggest drivers of this phenomenon.
Many analysts foresee a dismal scenario soon. A stagflation or a recession is not a scenario that can be ruled out. Even worse, rising food prices might cause famines in poor countries.
Risks from the world’s two largest economies
The recent surge of COVID-19 in China, and China’s authoritarian zero-covid policy are also stirring the global economy, as China is a big source of demand and supply globally. The recent decline in oil prices can be attributed to lower demand from China, due to its COVID-19 restrictions, for example. Moreover, the real estate problems that have been worrying Chinese authorities are far from over.
Thus, the US Federal Reserve knows that it must act thoughtfully. The goal is to control the inflation, which seems to be going wild, without limiting economic growth. The choice is difficult for the Fed, and it comes down to the lesser evil. Chairperson Jerome Powell has been timid in the recent past, when it came time to raise interest rates. Now, he might choose to overcorrect by raising the rates quickly. The market currently expects an increase of up to 75-100 percentage points in the upcoming FOMC meeting, on the 4th of May, with a probability of 86%.
The currency markets are also reacting to these developments, with experienced as well as beginners in forex trading seeking to benefit from recent movements. The USD was weakening on recent inflation figures then regaining strength. While the USDCNY pair is now showing signs of reversing its earlier downtrend.
Whatever happens in the US and Chinese economies will have implications on the global economy. The Fed has recently lagged other central banks in raising rates. The yield curve is showing signs of inversion, which is not very promising.
Russian invasion of Ukraine came after two difficult years of COVID-19. The situation in Ukraine is still uncertain. Even though the sanctions are smothering the Russian economy, they come with a cost on the economies imposing them.
Some analysts expect a long war ahead, which can also impact global growth negatively. Even before Russia started its war on Ukraine, the IMF had revised its forecasts for global growth rates. A further revision in light of the recent developments seems very realistic right now.
The rich get richer, the poor get poorer
The global economy is dealing with rising inequality as well. The pandemic has reversed years of progress on poverty reduction around the world. Russia’s war will likely add insult to injury, and this is evident by the rising inflation rates around the world. Inequality often leads to social tensions and unrest, which in turn can cause even more uncertainty.
The risks facing the global economy are plenty. The main ones are geopolitical tensions, a COVID-19 surge in China, and higher inflation rates. It is time for central bankers to take bold actions, to face rising inflation while still exercising pressure on Russia to end its war on its neighbor. Without such measures, the economic pain will likely continue.
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