HOW MANY BLOWS CAN GLOBAL GROWTH STILL WITHSTAND? - Filenews 22/4
By Daniel Moss
When does the time come when five-year economic growth will take the final blow? He may well overcome this last test – and come out of it weaker. Top officials will be asked to justify their salary.
The war with Iran will certainly have its price. The difficulty lies in determining whether this is just another obstacle or whether it will ultimately destroy the resilience that characterizes post-Covid growth. This tension was evident at the meetings of the International Monetary Fund held last week in Washington. It is encouraging to hear prudent statements from policymakers, but caution risks turning into an excuse for inaction. This can be smart in the short term. But it is not a viable strategy.
The conflict in the Middle East is sharpening the debate over the lessons learned by central banks since the coronavirus pandemic. Will they ignore the oil price shock that followed the start of hostilities on February 28, or will they start taking strict measures against inflation before it intensifies? The second option risks placing a further burden on businesses and consumers.
The assumption that inflation is temporary, a trap similar to the one they fell into in 2021, suggests a confidence that may not be justified. Hugh Peele, chief economist at the Bank of England, pointed out the drawbacks of this approach: "I'm not sure that waiting is necessarily the appropriate response to these kinds of inflationary trends, which at least have the potential to gain a self-sustaining momentum," he said on Friday.
The impact of the conflict on the global economy does not seem catastrophic. The IMF forecasts that global growth will fall to 3.1% this year, from 3.3% it had forecast in January. Not so bad, considering the massive turmoil in the energy markets. But it would be a mistake to treat these figures with complacency. The Fund warned that for every day that the energy supply is disrupted, the more we slide towards a less favourable outcome.
The rapid increases in interest rates after the Covid pandemic and US tariffs were significant negatives. Neither halted growth, nor did President Donald Trump's reckless efforts to undermine the autonomy of the Federal Reserve, the institution that, more than any other, guarantees global financial stability. And investors didn't get rid of U.S. assets en masse or walk away in panic from the dollar after the U.S. announced tariffs a year ago.
But if we scratch the surface of today's main forecasts a bit, the outlook is worrying. The IMF also outlined two less favourable scenarios. One predicts that growth will fall to about 2.5% and inflation will rise to 5.4%. The worst-case scenario, which the IMF describes as "serious", may lead to a recession: growth will fall to around 2%, while inflation will rise to around 6%. A sharp contraction in GDP is extremely rare. It happened in 2020, during the worst phase of the Covid pandemic, and in 2009, after the collapse of subprime mortgages. This suggests that conditions will not become overly frightening as long as there is no significant escalation of conflict – or a serious policy mistake.
As always, the world depends on a handful of major economies. China started with a decent performance – GDP grew by 5% in the first quarter compared to the same period the previous year, beating forecasts and suggesting limited effects from the war. However, domestic growth drivers are facing difficulties, as retail sales continue to disappoint and unemployment remains high. The U.S. may avoid a recession, with job creation remaining strong. But it would be a mistake to rely too much on these two giants.
Perhaps looking for the end of growth is not the goal. However, the foundations are threatened. Without the war, an upgrade in forecasts would be justified. The best that can be said is that the global economy is facing the conflict from the best possible position. I only wish the self-harm would stop.
Adaptation – Editing: Lydia Roubopoulou
