a year ago

Global economy at a crossroads

Militants of the self-proclaimed Donetsk People's Republic take part in shooting drills at a range on the outskirts of Donetsk, Ukraine, on December 14, 2021. —Reuters Photo
Militants of the self-proclaimed Donetsk People's Republic take part in shooting drills at a range on the outskirts of Donetsk, Ukraine, on December 14, 2021. —Reuters Photo

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That the global economy is in turmoil is no news now. What everyone is waiting to hear is:  can it become better before getting worse? As of now no one, from number crunchers in banks and research bodies to policy makers in governments, seem to know. The magnitude of uncertainty is such that no one is even hazarding a guess. Like love, the course of global economy has never been smooth, weathering one disturbance after another. This uneven ride has been regarded as normal, being amenable to the self- correction mechanism of market or routine intervention by central banks or government policymakers. But this time around, the disturbance has appeared in the form of turbulence and by no stretch of analysis can be considered as 'normal'. It is so severe in its impact on economies, developed, emerging and developing, and the lives of their people that one shudders to think of it even as 'new normal'. The American economy has posted negative growth for two consecutive quarters and is technically in recession. The European Union (EU) economies are about to formally enter the recessionary phase, defined by the same criteria of negative growth, one indicator of which is the Purchasing Managers' Index (PMI) which at 49.8 per cent ,is  already below the growth indicating minimum of 50 per cent. .In China, the second biggest economy in the world now, the Purchasing Managers' Index (PMI), an indicator by which manufacturing output is measured, has been hovering little over 50 per cent, perilously low because PMI below 50 per cent indicates negative growth. In Japan, the fifth largest economy, 10 per cent has been slashed from last quarter's PMI. So, all around the global economy there are telltale signs of a recession setting in  in major economies that drive global economic growth. This concomitant decline in growth  along with rising inflation has  hoisted the red flag of stagnation  , a development known as the worst possible situation  that an economy can be.

It was understandable that  a section of people  in America who became unemployed after the Covid-19 pandemic lined up for food  boxes in the worst period of the pandemic .But it beggars belief that people from middle class in Bradford, UK  are arriving now at a food bank in steady streams  to collect produce parcels  described as ' life savers',  and whose number is estimated to be twice as many  compared to the pandemic period( 2020-2021).Of course, Bradford being the fifth most income deprived city nationwide is not typical of Britain as a whole but the economic distress   people are experiencing there is indicative of the havoc caused in the lives of people  by cost of living in the country even  after the winding down of the pandemic crisis.

For lower income people in other developed and emerging countries daily life cannot be much different. The question being asked by many is: Why is this 'cost of living' beast running amok now when the corona virus has been put under leash?

To have some insight into the problem one could do worse than look at the evolution of inflationary pressure on prices in the global economy in the recent past. It can be seen that inflation, the prime driver of cost of living, has   come in two waves, in quick succession or even overlapping each other. To trace out the causes the time lines of the two waves, these have to be seen in their proper perspectives.

The first wave came, in almost all countries that were visited by the pandemic with varying severity, immediately  after the deadly phase (Delta variant) of the viral  infection was over in 2021.Flush with stimulus money injected during the pandemic, both through expansionary monetary and fiscal policies, economies were awash with money. Unemployment came down so fast in developed countries like America that wages rose higher to attract labour. It was a classic case where the Philip's curve, showing inverse relation between unemployment and wages (prices), could be seen at play across the economy. Added to wage-push rise in prices were disruptions in supply chains caused by the pandemic. In a globalised economy many industries, both in developed and emerging (including developing) countries, depended on imported raw materials and intermediate goods from other countries for their manufacturing sector. Supplies through trade, disrupted during the pandemic, could not be restored immediately after economic recovery began and where supplies resumed, higher rates were charged by freight ship-owners. In consequence, the cost of production rose for almost all goods and services that were traded. This was the cause for the first wave of inflation. While both wage push ( or demand pull) and supply chain push( as cost)  factors contributed to inflationary situation in industrially developed countries, for developing countries it was the latter that made the major contribution. For the mitigation of the problem of inflation developed countries could not do much in respect of supply chain bottlenecks in the short term (ditto for emerging and developing countries) but they could rein in the easy money policy by stopping purchase of treasury bills and raising policy rates that was below 1.0 per cent in America and in the negative territory in European Union (EU) and Japan for over a decade, since 2008 to be precise.

As regards developing countries like Bangladesh, the injection of money in the market was discontinued as soon the worst phase of pandemic was over. So, the inflationary rise in prices in developed countries like America, EU, Japan could be brought under control if their central banks raised policy rates and stopped quantitative easing as soon as inflationary rise in prices raised their heads. But they  dithered and when at last took heart to raise the policy rate it was at a measly rate of. 25 (quarter)  points. The Fed in America could muster courage to raise the rate by .75 points only on 30 July when inflation was already above 9 per cent, a 40 year high. The European Central Bank (ECB), more concerned to defend euro against dollar raised the benchmark rate only a day before Fed. The Bank of Japan (BoJ),on the other hand, haunted by decades- long deflation, has kept the basic rate still in the negative territory  and is  continuing merrily with its stimulus packages.

The central banks in the industrial developed countries, therefore, have not played their timely role for which inflation has exacerbated, affecting  the global economy. For inflation in developing countries, the main cause being costs transmitted through disrupted supply chains there has not  been much of a policy space excepting tightening the volume of imports by culling inessentials and through fiscal austerity. The former has been applied in countries like Bangladesh but austerity is a nut that has always proved hard to crack. Expenditures in public sector have many vested interests  and unless closely  monitored by political authorities, cannot go beyond window- dressing and tokenism. This is not a task where politicians have excelled.

Before the beast of global inflation could be tamed and brought under leash, the war in Ukraine has unleashed a more powerful thrust on its rampaging than the pandemic, raising inflation to 40 year high in America( 9.5 per cent), UK ( 8.6 per cent) and EU (7.8 per cent) in the month of June. This increase has taken place through stoppage and disruptions in exports of grain, soybean oil, fertiliser and oil and gas from Ukraine and Russia, two major suppliers of these in the world. All these are items vital for the life and economic activities of many countries.   Food crisis has already struck countries in Africa and the middle- east while cost of living in UK and the EU has skyrocketed because of rise in prices of oil and gas. Increase in price of crude oil has been exacerbated by slapping economic sanctions on major oil producing countries like Venezuela, Iran, and now on Russia. As it is, oil has been a producers' market since the mid-1970s because of the cartel (OPEC) formed by them that keeps production low to push price higher than would be the case if market forces of demand and supply were allowed to determine price. The imposition of sanctions on Russia, the second major producer of oil and gas, has compounded the distortion in the market further, aggravating the price situation.

The second wave of inflation that has appeared in the wake of the war in Ukraine has been caused entirely by geopolitical rivalry spearheaded by America, with its allies unwittingly following suit. America feels highly gratified because it has been successful in uniting its allies against Russia. But as days go by and costs of living bite deeper and more viciously, rendering families all over the world more miserable, except the top 1.0 per cent, the politics of cold war era will be seen as the enemy of people.

The erosion in the standard of living across the board, again with the exception of the top 1.0  per cent, will give rise to widespread  grievances and discontent among consumers, reaching a climax next winter if oil  and gas embargo through sanctions  continue. Anti-government demonstrations will flare up in country after country making the much vaunted democracy fragile even in developed countries. The united stand of European countries against Russia for its invasion in Ukraine will  become gradually  frayed, taking the back seat to  daily urgent economic necessities of general public. If the war in Ukraine is not brought  to an  end through negotiation by the two parties through mutual give and take, a catastrophe will pulverise the global economy,  the like of which has not been seen before. Being a man-made crisis, monetary or fiscal policies have no role to play in stemming the flood tide of economic consequences of the Ukraine war, particularly the sharp rise in cost of living through inflationary rise in prices.

Only a reversal of suicidal realpolitik, that thinks only of spheres of influence by major powers, can restore health to the badly scarred global economy and begin the process of normalisation.

But hoping to get back to status quo ante will be like running after the will- o- the- wisp. The global economy will have to settle down with a 'new normal' in the real sense of the expression and not as a fashionable rhetoric. The more delayed is the negotiated settlement of Ukraine war the greater will be the inconvenient quotient of the ' new normal'. If ever there were any occasion for 'dismal' economics to prevail over politics in the raw, it is now.


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