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Would war bail out world economies?

Oct 19,2022 - Last updated at Oct 19,2022

The International Monetary Fund (IMF) downgraded its 2023 forecast for the world economy, suggesting that 2023 "will feel like a recession" for many, thanks to central bank reactions around the world. The IMF and the World Bank have highlighted a thorny confluence of crises, including the consequences of a protracted pandemic, rising geopolitical tensions, rising inflation and mounting fears of a recession. With the current political tension in Eastern Europe, there is little hope of addressing the economic plight of low-income economies.

On October 11, 2022, the IMF cut its forecast for global economic growth for 2023 to 2.7 per cent from its July forecast of 2.9 per cent, citing rising energy and food costs and rising interest rate pressures, warning that "the worst is yet to come". Both international financial organisations warned of the real danger of a global recession next year as “advanced economies are slowing down in Europe”.  

What the developing nations should understand is that currency depreciation would mean that the level of debt on developing countries is becoming more and more stressful, as the super-strong US dollar, in the wake of sharp interest rate increases by the US Federal Reserve, has dealt a heavy blow to non-dollar currencies, subjecting developing economies that depend on external debt to higher debt-servicing costs.

The IMF believes that about 33 per cent of the global economy will experience at least two consecutive quarters of negative growth by the end of 2022 and 2023. It is also expected that the total amount that will be wiped out due to global economic slowdown will be US$4 trillion dollars by 2026, which is the size of Germany's GDP.

It is also expected that the US is likely to slide back into recession within a few months from now. This requires world leaders to meet to decide on a plan or a roadmap for world economic recovery to avoid turbulent global stock and currency markets. It should be noted that the persistent and unwavering position under the pressure of unexpectedly high inflation has increasingly pitted the Federal Reserve against the market.

In August, the World Trade Organisation cut its forecast for global merchandise trade growth by 1.7 percentage points. This means that China’s export growth is expected to slow in line with the slowdown in global trade, leading to shortages in supplies and shortages in commodities.

China’s foreign direct investment will continue its upward trajectory. Meanwhile, hyperinflation and the energy crisis have put some regions in Europe in the negative position of declining industrialisation. This indicates that China, backed by its full industrial categories and its huge market, is still the destination for the relocation of the manufacturing sector in Europe.

The global economy multiplied about 3.9 times during the period from 2000 to 2008, averaging $US18 billion on an annual basis. This large growth was driven by several factors; most notably the liberalisation of the movement of capital that resulted from the domination of neoliberal policies around the world. It was apparent that such accelerated growth would be disrupted somewhere, paving the way for the financial crisis of 2008, where the serious complications of the global system started to appear perceptibly.

In 2020, the COVID-19 predicament broke out, followed by the Russian-Ukrainian war in February 2022, to bring the problems of the global economy back to the fore, especially with the collapse of global supply chains and the rise in prices of basic commodities such as energy and food.

During the COVID-19 crisis, the world’s central banks turned to monetary facilitation in order to maintain economy boom, but this easing was merely achieved through printing more banknotes unremittingly; Thus, the large monetary expansion became a driving force for a very large global inflation, especially with the jolt of the 2022 war, which incurred heavy burdens on the global economy that was incompetent to recover from the magnitudes of the pandemic shudder and the ramifications of the 2008 crisis.

Actually, the 2020-2022 successive economic tremors pushed the global inflation rate to 7.8 per cent in April 2022, the highest since the 2008 crisis. This ratio recorded 8 per cent in advanced economies, the highest level since 1983, and 9.9 per cent in emerging and developing economies, the highest level since 1995. Thus, the inflation rate was higher than the target levels in all advanced economies and in about 92 per cent of emerging and developing economies targeting inflation rates.

This combination of high inflation and weak growth rates cause fears of a return to the specter of global stagflation (stagnation + inflation) as it occurred in the 1970s, and this indicates that there are significant risks if inflation continues to rise. This prompts the world's central banks to tighten their monetary policy, led by the Federal Reserve, which raised interest rates at the highest rate in two decades. Despite this, some argue that interest rates should be raised more to curb inflation.

Thus, developed economies face a hard choice: growth or inflation; if monetary policy is not tightened enough, inflation will continue to rise, and if policy is tightened, growth will decline and these economies will enter a recession. Consequently, unemployment will rise. 

In addition, the high ratio of public debt to the size of the economy, which exceeded 100 per cent in most of these economies, reflects the severe damage caused by the global economic crises, indicating that the possibility of keeping the economy afloat by borrowing is running out. The case of the developing economies seems even worse as these economies have lost their growth momentum, especially with the Chinese economy contracting at a rate of 2.5 per cent, which was driving the growth of these countries.

The world economy has entered a bottleneck and the only way out is a limited war to export the advanced nations’ economic issues to the developing countries. 

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