Page 44 - bne magazine July 2022_20220704

44 I Special Report bne July 2022
Still, Russia’s problems are specific
and largely caused by sanctions, not economics. But the size of the economy – the biggest ever to be hit with such extreme sanctions – is large enough to hurt the global economy. The World Bank estimates that a two-year recession is possible, which means the Western sanctions will boomerang back and hurt everyone to some extent. Stagflation will be one of the main vectors for this pain.
“Inflation has risen sharply from mid-2020 lows, while global growth, by contrast, is moving in the opposite direction and will be lower than in the 2010s for the rest of the decade,” the bank said in its forecast.
In April 2022, global price growth amounted to 7.8% – for the world as
a whole, this is the highest level since 2008, and for developed countries – since 1982, according to the World Bank.
1970s vs 2022
All this is reminiscent of the stagflation of the 1970s, which was triggered by high oil prices, inflation, significant federal spending and loose monetary policy, the World Bank notes.
The war and persistent supply chain problems also mean production in 2023-2024 will grow at a reduced pace throughout the world. In addition, the World Bank raised its oil price forecast by a quarter – in the base scenario, the average price of a barrel of Brent in 2022 will be $100, and in the negative, with extended sanctions against
Russia (this scenario is now being implemented) it will rise even higher to $140 and so further mitigate the pain of sanctions on Russia, The Bell reports.
In the 1970s inflation in developed countries went into double digits against the backdrop of falling GDP and rising unemployment. The crisis peaked in the mid-1970s, when inflation in the United States exceeded 12%, unemployment 9%, and economic growth was negative, and in the early 1980s, when inflation went beyond 14%, according to The Bell.
One of the main factors of stagflation
in the 1970s was a sharp rise in prices for raw materials and especially oil after the Arab countries imposed an embargo on exports to the United States in 1973 and the Iranian revolution in 1978-9 also sent prices upward. The
problems were made worse by the soft monetary policy of the world financial authorities, who after 1968 feared unemployment growth is greater than inflation, and actively printed money.
The current situation differs from the stagflation of the 1970s with a strong dollar, less dramatic increases in commodity prices and the presence of stocks on the balance sheets of large financial institutions, the World Bank said. In addition, central banks now have more tools to curb inflation than they used to.
Stagflation was ended in the 1970s after central banks finally hiked rates aggressively, but that caused a global recession that lasted several years as well as triggering several financial crises.
The lights are already flashing red. Real interest rates around the world are already deeply negative in many countries, averaging minus 5.2% for developed countries and minus 3.2% for developing countries, The Bell reports. The longer the rate hikes are delayed the more pain it will cause when they eventually are hiked.
the world’s biggest EMs registering outflows similar in scale to the RMB devaluation scare in 2015 and 2016," Brookes et al said.
Inflation has soared around the world and especially in developing markets. Even in the relatively mature and well-run Central European markets, inflation is starting to run out of control as sharp interest rate hikes
World hit by interest rate and inflation shock says IIF
Ben Aris in Berlin
The world’s economy is being hit by an inf lation and interest rate shock that shows no sign of abating, Institute of International Finance (IIF) said in a recent paper.
“We are in a global interest rate and high inflation shock. Longer- dated government bond yields have risen sharply across advanced economies, tightening financial
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conditions, weighing on growth and pushing up risk aversion,” Robin Brooks, managing director and chief economist at the Institute of International Finance (IIF) said in a note together with economists Jonathan Fortun and Jack Pingle.
“This is also weighing on flows to emerging markets, with our high- frequency flow tracking across