By RICARDO EVANGELISTA
The global economy has been on a roller coaster ride since the start of 2020. First, we had COVID and the lockdowns, with economic activity almost coming to a standstill. Then came the euphoria of the reopening, which followed the success of the global vaccination programme. However, it was not long before inflation appeared on the radar of policymakers.
After decades of price stability, double digit inflation returned to developed economies, caused by supply chain bottlenecks, excessive pandemic-era savings and a very tight labour market. The return of this old foe forced central banks to sharply raise interest rates. Against this background, and with the added headwinds of the war in Ukraine, most analysts expected the modest economic expansion of 2022 to give way to a recession in 2023.
However, the prospects of a recession in Europe and the US now seem less likely. There are several reasons for this optimism. These include China’s abandonment of its unsustainable zero-COVID policy; the stabilisation of inflation and expectations of less hawkish central banks; falling energy prices in Europe; and the positive impact of President Joe Biden’s Inflation Reduction Act on US economic growth.
With the end of its ‘zero COVID’ policy, China reopened for business. This was a development that surprised many and had a positive impact on international trade. Additionally, the country’s abandonment of ‘zero COVID’ demonstrates a commitment to long-term economic stability, which will help to further strengthen the global economy.
Inflation is a major concern for policymakers, and central banks reacted to its return by implementing restrictive measures, such as halting asset purchases and increasing interest rates. These policies have since delivered the desired results, slowing down the rise in consumer prices.
As a result, the interest rate-hiking drive of the past 12 months is likely to come to an end by the summer, earlier than previously expected. This pivot will stimulate economic growth, as lower interest rates make it easier for individuals and businesses to borrow money and invest in the economy.
Energy prices play a significant role in the global economy, and steep rises increase the cost of goods and services, leading to inflation and a slowdown in economic activity. With Russia’s invasion of Ukraine, energy prices in Europe reached historical maximums, threatening the economic stability of the continent. However, a mild winter lent a helping hand and energy prices started to fall and are now below pre-invasion levels. This will help to mitigate the risk of a recession and boost the economic prospects of the old continent for 2023.
The Inflation Reduction Act (IRA) is a deceptively named piece of legislation. Its main purpose is not to reduce US inflation, but to stimulate growth by investing and subsidies, mainly in the renewables sector. The Act’s deployment is expected to provide a shot of adrenaline to the US economy, promoting sustainable growth and having a positive impact for years to come.
However, despite the improved outlook, dark clouds still linger on the horizon. The war in Ukraine continues to generate geopolitical instability, and could trigger further volatility in energy and food prices. Labour markets across the western world remain extremely tight, pushing up salaries and feeding inflation. Finally, globalisation as we have known it for the last 30 years is over. International trade shrunk and protectionism is on the rise. And this rise in protectionism is perhaps the greatest medium-to-long-term threat to global prosperity.
Commenting has been disabled for this item.