BRUSSELS – The global economy is heading for a potentially bleak period as rising costs, shortages of food and other goods, and the continuing Russian invasion of Ukraine threaten to slow economic growth and cause a painful global recession.
Two years after the coronavirus pandemic emerged and left much of the world paralyzed, policy makers face ongoing challenges, including clogged supply chainsAnd Lockdowns in China The possibility of an energy crisis as nations Weaning themselves off Russian oil and gas. These clashing forces made some economists begin to worry about a global recession as different regions of the world find their economies hurt by events.
Finding ways to avoid a global slowdown while continuing to put pressure on Russia for its war in Ukraine will be the primary focus of finance ministers from the Group of Seven, meeting in Bonn, Germany, this week.
The economic challenges faced by governments around the world could begin to undo the united front that Western nations have maintained in the face of Russian aggression, including sweeping sanctions designed to cripple their economy and efforts to reduce dependence on Russian energy.
Policymakers are weighing subtle trade-offs as they consider how to isolate Russia, prop up Ukraine, and keep their economies afloat at a time when prices are rising rapidly and growth slowing.
Central banks around the world have begun raising interest rates to help tame rapid inflation, steps that will dampen economic growth by raising borrowing costs and could lead to higher unemployment.
The European Commission on Monday released its revised economic forecast, which shows growth slowing to 2.7 percent this year from 4 percent estimated in its winter report. At the same time, inflation has reached record levels and is expected to reach 6.8% on average for this year. Some Eastern European countries are seeing sharper increases, with Poland, Estonia, the Czech Republic, Bulgaria and Lithuania all facing inflation rates of over 11%.
Last week, Christine Lagarde, president of the European Central Bank, signaled a possible increase in interest rates in July, the first such move in more than a decade. at letter In Slovenia, Mrs. Lagarde compared Europe to a man “taking a blow from fate”.
Eswar Prasad, former head of the International Monetary Fund’s China division, summed up the challenges facing the G7 countries, saying that “their policy makers are stuck in the quandary that any tightening of screws on Russia by limiting energy purchases is exacerbating inflation and hurting growth in the country and their economies.” .
He added, “Such sanctions, despite all the moral justification on which they are based, lead to increasingly heavy economic losses which in turn could have internal political consequences for the G7 leaders.”
However, the United States is expected to pressure its allies to continue isolating Russia and providing more economic aid to Ukraine despite their economic problems. Officials are also expected to discuss the merits of imposing tariffs on Russian energy exports ahead of a proposed European oil embargo that the United States fears could drive up prices by limiting supplies. Policymakers will also debate whether they should pressure countries like India to roll back export restrictions on basic food products that are exacerbating already high prices.
Against this backdrop, there is a growing urgency to help sustain the Ukrainian economy, which the International Monetary Fund has said needs an estimated $5 billion per month in aid to continue government operations. The US Congress is close to passing a $40 billion aid package to Ukraine that will cover some of those costs, but Treasury Secretary Janet L. It called on its European counterparts to provide more financial assistance.
Finance ministers are expected to consider other measures to provide relief to Ukraine. There is growing interest in the idea of grabbing some of the roughly $300 billion in Russian Central Bank reserves that the United States and its allies have frozen to help fund Ukraine’s reconstruction. Treasury officials are studying the idea, but have concerns about the legality of such a move and the potential for it to raise doubts about the United States as a safe place to store assets.
Ahead of this week’s G7 meeting, US officials saw the economic challenges facing Europe firsthand. During a pause to meet top officials in Warsaw on Monday, Ms Yellen acknowledged the damage the conflict in Ukraine is doing to Poland’s economy, as officials raised interest rates sharply to combat inflation. Poland has absorbed more than three million Ukrainian refugees and has faced cuts in gas exports from Russia.
“They have to deal with tighter monetary policy as they do with countries around the world and the United States,” Yellen told reporters. “While Poland is committing huge expenditures to bolster its security, this is a difficult balancing act.”
An economic downturn may be inevitable in some countries, and economists are weighing multiple factors as they gauge the likelihood of a recession, including a sharp slowdown in China linked to ongoing Covid-19 lockdowns.
The European Commission, in its economic report, said the EU was “first among the advanced economies to take a hit”, due to its proximity to Ukraine and its dependence on Russian energy. At the same time, it has absorbed more than five million refugees in less than three months.
Deutsche Bank analysts said this week that they believe a recession in Europe is unlikely. By contrast, Carl B. Weinberg, chief economist at High Frequency Economics, warned in a note on Monday that with lower consumer demand and production, “the German economy is headed into a recession.” Analysts at Capital Economics expected Germany, Italy and Britain to face recessions, which means there is a “reasonable chance” that the broader eurozone will also face one recession, defined as two consecutive quarters of lower production.
Vicki Redwood, chief economic adviser at Capital Economics, warned that sharp increases in interest rates by central banks could lead to a global deflation.
“If inflation and inflation expectations prove more stubborn than we expect, and interest rates need to rise further as a result, a recession is likely to be on paper,” Ms Redwood wrote in a note to clients this week.
The main culprit is energy prices. In Germany, which was heavily dependent on Russian fuel among Europe’s major economies, the heavy industrial business sector as well as consumers are feeling the pressure most.
At the company’s annual general meeting last month, Martin Brudermüller, CEO of chemical giant BASF, said Russian gas shipments “support the competitiveness of our industry.”
While calling for a reduction in its dependence, Mr. Brudermüller nonetheless cautioned that “if supplies of natural gas from Russia stop suddenly, it will cause irreversible economic damage” and may force a halt to production.
The implications of the gas ban have been hotly debated among German economists and policymakers, with analyzes ranging from manageable to catastrophic. The flow of energy is just one of many supply concerns in the industrial sector.
Rising food prices is another concern among finance ministers. The Treasury is expected to release a report later this week outlining plans by the World Bank and other international financial institutions to combat food shortages.
The halt in wheat exports from Ukraine and Russia, which together account for 28 percent of global exports, along with supply chain disruptions, a severe drought in India that caused grain shipments to be banned and Covid-related shutdowns in China, too. It caused food prices to rise and increased global hunger, particularly in Africa and the Middle East.
The question for American and European policymakers is how to control price hikes without pushing their economies into recession. The Federal Reserve has begun raising interest rates to tame US inflation, and its Chairman, Jerome H. Powell, has acknowledged that cutting rates without seriously hurting the overall economy will be a challenge.
On Tuesday, Charlie Scharf, CEO of Wells Fargo, said during an event hosted by The Wall Street Journal that “it’s going to be hard to avoid some kind of recession.”
This conundrum explains the European Central Bank’s reluctance to raise interest rates. In a plus column, the European Commission noted that unemployment in the eurozone had fallen, as had the government deficit, despite the rising costs associated with the war.
While food prices are rising around the world, the level of inflation varies widely. Food inflation reached 2.5 percent in France and Ireland during the first three months of 2022 and 10 percent in Eastern European countries. While in Turkey and Argentina, from 60 to 70 percent in March alone, according to last week’s analysis from ING.
In a speech to the Brussels Economic Forum on Tuesday, Ms Yellen made the case that Russia’s actions are a reminder that countries should not trade national security for cheap energy. She said it was important to reduce dependence on Russia and China and to speed up investments in renewable resources.
“No country controls the wind and the sun,” said Ms. Yellen. “Let’s make sure that this is the last time the global economy is hostage to the hostilities of those who produce fossil fuels.”
Alan Raport reports in Brussels, and Patricia Cohen in London.
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