Global economy at a delicate crossroad – I

Global economy stands at a delicate crossroad, where wrong policy choices will be difficult to unwind in at least the short-term, and will take it away, and perhaps rather quickly, from a much talked-about ‘new normal’ world of less income and wealth inequalities, green transformation, and stronger, inclusive democracies.

There is an urgent need for undoing global Neoliberal order, which in ascendancy since around the last four decades, and which has not allowed moving towards this much-needed ‘new normal’ in any significant way, given on one hand, countries in general have continued to put domestic growth targets, and vested interests of elites in terms of political mileage/short-term financial advantage, above providing detailed and ambitious plans to reach required global warming targets.

On the other hand, weak public sector/regulation and multilateralism sticking with safeguarding intellectual property rights (IPRs) even during the pandemic, has allowed excessive profiteering over and above technical supply constraints, creating on one head strong inflationary headwinds for both developed and in particular developing countries and, on the other, has sent already acute global inequality levels before the pandemic soaring.

Oxfam highlighted this phenomenon of quickly rising inequality, in its recently released report ‘Profiting from pain’ as ‘Billionaires have seen their fortunes increase as much in 24 months as they did in 23 years. Billionaires in the food and energy sectors have seen their fortunes increase by a billion dollars every two days. Food and energy prices have increased to their highest levels in decades. 62 new food billionaires have been created.

The combined crises of Covid-19, rising inequality, and rising food prices could push as many as 263 million people into extreme poverty in 2022, reversing decades of progress. This is the equivalent of one million people every 33 hours.

At the same time a new billionaire has been minted on average every 30 hours during the pandemic. This means that in the same time it took on average to create a new billionaire during the pandemic, one million people could be pushed into extreme poverty this year.’

For the developed world, dealing with headwinds from both demand-pull, and cost push inflation, to avoid possible stagflation, will require a well-planned monetary tightening effort, and to balance that effort with initiating a non-neoliberal, counter-cyclical policy agenda both at home, and through improving multilateralism to help developing countries, especially those in an IMF programme — which are in general pro-cyclical, and neoliberal — do the same.

Renowned economist Jayati Ghosh in a New York Times (NYT) article highlighted a very difficult economic situation facing developing countries as: ‘“It’s like wildfires in all directions,” said Jayati Ghosh, an economist at the University of Massachusetts Amherst. “This is much bigger than after the global financial crisis. Everything is stacked against the low- and middle-income countries.”’

Hence, at the back of high inflation, for instance, in the US, UK and Eurozone, requiring a significant level of monetary tightening, it is important that such tightening is done — along with supply-side focus, since inflation is also significantly due to global supply shock, which has been made worse by the war in Ukraine by Russia — in a well-tapered way so as to soft-land policy rate hikes.

This will likely allow avoiding recession and stagflation, on one hand, and at the same time tame demand-pull inflation, mainly at the back of rather over-board stimulus injections during the pandemic.

The term ‘recession’ also has more than one connotation, and it is important to understand the different ways in which it may be viewed as pointed out by a recent Financial Times (FT) article ‘Is the global economy heading for recession?’ as ‘Defining a global recession is no easy task. For individual countries, some economists define a “technical recession” as two consecutive quarters of contraction in gross domestic product.

The Financial Times prefers a more flexible definition as does the US, where the National Bureau of Economic Research defines a recession as “a significant decline in economic activity that is spread across the economy and that lasts more than a few months”.’

The recently released Global Economic Prospects (GEP) report by World Bank, its twice-yearly report, projected a difficult economic outlook as ‘Our forecasts reflect a sizable downgrade to the outlook: global growth is expected to slow sharply from 5.7 percent in 2021 to 2.9 percent this year.

This also reflects a nearly one-third cut to our January 2022 forecast for this year of 4.1 percent.’ In addition, being the largest economy in the world, a recession in US affects global economy significantly, given China’s economic growth already has been forecasted by GEP to be 4.3 percent for 2022, as against 8.1 percent, mainly due to Covid-related lockdowns.

Moreover, a recent FT published article ‘OECD calls for burden-sharing to counter gloomy economic outlook’ indicated: ‘The OECD lowered its global growth forecast for 2022 to 3 per cent, from 4.5 percent in December. That put it below the IMF’s 3.6 percent estimate made in April and suggests the global economic pain as a result of the war is still increasing.’

With regard to a possible recession in US, and its response in terms of monetary tightening, a recent Economist article ‘What America’s next recession will look like’ pointed out: ‘Big banks, prominent economists and former officials are all saying that a downturn is a near certainty as the Federal Reserve wrestles inflation under control.

Three quarters of chief executives of Fortune 500 companies are braced for growth to go negative before the end of 2023. … The question is how tight, and therefore how much the economy could suffer: the higher the Fed has to raise rates, the more punishing the downturn will be. …The Fed, for its part, has been too slow to respond to inflation, but the credibility it has built up over the past few decades means it can still fight an effective rearguard action.’

This delicate handling of policy rate is also important for allowing developing countries to not lose foreign portfolio investment (FPI) too much, too quickly. Having said that, a rather late decision to start monetary tightening by US Federal Reserve, and at somewhat high paced increases since then, has caused a meaningful FPI loss in developing countries overall.

A recent Economist article ‘Emerging markets hit by worst sell-off in decades’ pointed out in this regard: ‘Emerging market bonds are suffering their worst losses in almost three decades, hit by rising global interest rates, slowing growth and the war in Ukraine. …Nearly $36bn has flowed out of emerging market mutual and exchange traded bond funds since the start of the year, according to data from EPFR…’

On the other hand, developed countries to balance monetary tightening with well-measured, precisely targeted supply-sided measures and counter-cyclical policies, to safeguard against the impact of rising fuel and food prices, and in turn, dampening the impact of cost-push inflation. Economics Nobel laureate Joseph Stiglitz, while recently talking with Bloomberg on the sidelines of World Economic Forums’ (WEF) 2022 annual meeting pointed out in this regard: ‘Raising interest rates is not going to solve the problem of inflation.

It’s not going to create more food. Is going to make it more difficult, because you aren’t going to be able to make the investment. What you do is you have supply-side interventions… so at least try to do everything we can globally to increase the supply…’

For instance, the difficult economic situation facing US in terms of both significant supply-side and demand side inflationary pressures, and its likely impact in terms of a possible recession, a recent Economist article ‘A recession in America by 2024 looks likely’ pointed out: ‘There is no escaping the squeeze ahead for America’s economy.

Surging food and petrol prices are eating into people’s spending. In April consumer prices were 8.3% higher than a year earlier. Even excluding food and energy prices, annual inflation is 6.2%. Supply-chain problems could flare up for as long as war rages in Ukraine and China sticks to its zero-Covid policy. … The Fed is promising to pour water on the fire. Investors expect it to have raised interest rates by more than 2.5 percentage points by the end of 2022. The central bank is crossing its fingers, saying that it can hit its 2% inflation target without causing a downturn. …In fact, although a recession is likely, it should be a relatively shallow one.’

(To be continued on Wednesday)

Copyright Business Recorder, 2022