TWe are almost halfway through the 2020s, and it looks certain to be the most difficult decade for the global economy since the 1930s. All the finance ministers and central bank governors who attended the International Monetary Fund’s spring meetings in Washington last week know this, even if they are not prepared to admit it publicly.
The IMF prefers to look on the bright side. The company has revised its global economic growth forecast slightly upward, saying it believes the scars from the coronavirus pandemic and the cost-of-living crisis are not as severe as initially feared. Interest rates rose without causing the anticipated recession. Soft landing is refined. Several countries performed well. Examples are the United States and India.
This analysis is true up to a point. There are many scars in the poorest and weakest countries, with the US being the outlier among the developed world and Europe’s performance significantly deteriorating. Medium-term growth prospects remain bleak.
A big cloud hanging over the IMF and World Bank meeting was the possibility that Iran’s missile attack on Israel could lead to a full-scale conflict, with the same negative impact on the global economy as Russia’s invasion of Ukraine in 2022.
So far, those concerns have not materialized. Israel duly retaliated with missile strikes of its own, but Tehran and Tel Aviv appear to want to avoid all-out war. Oil prices rose, but not by much. There was no repeat of 1973, when the Yom Kippur War caused oil prices to more than quadruple, adding to already strong inflationary pressures in the West.
The global economy may avoid a repeat of either 2022 or 1973, as the fight against inflation is not progressing as smoothly as it seemed a few months ago. U.S. central bank governor Jerome Powell responded to stronger-than-expected price pressures by hinting that cuts in U.S. interest rates may be delayed. A few months ago, there was talk on Wall Street that there would be six or seven U.S. interest rate cuts this year. Now it’s possible that it doesn’t exist at all.
Meanwhile, Bank of England Governor Andrew Bailey said the UK’s inflation situation was disproportionate, with a sharp fall in household utility bills being offset by service sector inflation of 6%. Threadneedle Street views service sector inflation as a good indicator of cost pressures generated by the domestic economy. It will want to see that pressure ease further before lowering rates from the current 5.25% level.
It is therefore clear why the IMF is monitoring events in the Middle East with caution and some trepidation. The global economy has just come out of intensive care and badly needs a period of calm to recover. This will help avoid damage from oil prices rising well above $100 if the situation in the Middle East worsens.
Coincidentally, last week there was more focus in Washington on the war in Ukraine than on what was going to happen in the Middle East. The US Congress has agreed to a new aid package for Kiev, while the G7 is considering how to use interest on seized Russian assets to help Ukraine.
In reality, Russia’s economy has withstood sanctions much better than expected two years ago. The IMF has revised upward its growth forecast for Russia for this year and next.
This is partly due to the boost in industrial production necessary for the war effort, but also because Russia has found many customers for its energy exports. The war highlighted and widened the gulf between the rich countries of the Global North and the emerging powers of the Global South.
IMF Managing Director Kristalina Georgieva said support for Ukraine remains “stable and strong” but that is not the case in reality. Kyiv receives support from G7 countries, but not from many emerging economies such as South Africa.
After newsletter promotion
The G7 has taken a stand on Ukraine, but has not resolved the equally brutal but less publicized war in the developing world. As the G7 calls for a show of unity against Russian aggression, we ask where was the unity during the pandemic when rich countries got the lion’s share of vaccines? They want to know why G7 countries cut their aid budgets and why the debt crisis was allowed to worsen. They have a point on every point.
Actually, not much happened in Washington last week. Reports poured in as usual, but not much else. But something more important is going on behind the scenes, and that is the collapse of the American-led form of globalization.
This model involves Western companies outsourcing manufacturing to China and other low-cost destinations, and for a while, providing cheap goods keeps inflation low and central banks Life has become easier.
Those days are over. The United States and Europe want to protect jobs by restricting imports of Chinese goods and subsidizing domestic manufacturing. Just last week, Joe Biden called for: triple the tariff It opposed Chinese steel in a move aimed at appealing to blue-collar workers in battleground states.
This is not the first time something like this has happened. The era of globalization before World War I collapsed as a result of wars, pandemics, inflation, and protectionism. Little by little, history is repeating itself.
