Spanish Flu Era.
When the Spanish flu pandemic struck in 1918, World War 1 was not over. Upwards of fifty million people died worldwide from the flu. Post-war recessions hit hard in 1919 and again in 1920, driving unemployment up. Unrest and violence were roiling the world.
The depression of 1920-21 was a sharp deflationary recession in the United States, United Kingdom and many other countries, beginning 14 months after the end of World War 1. It lasted from January 1920 to July 1921. The extent of the deflation was not only large but large relative to the accompanying decline in the real domestic product.
There was an 18-month post-World War 1 recession immediately following the end of the war, complicating the absorption of millions of veterans into the economy. The economy started to grow but it had not yet completed all the adjustments in shifting from a wartime to a peacetime economy.
Covid-19 Era.
Compounding the damage from the Covid-19 pandemic, the Russian invasion of Ukraine has magnified the slowdown in the global economy, which is entering what could become a protracted period of feeble growth and elevated inflation. This raises the risk of stagflation, with potentially harmful consequences for middle-income and low-income economies alike.
Global growth slumped from 5.7 percent in 2021 to
2.9 percent in 2022 - significantly lower than 4.1 percent that was anticipated
in January. It is expected to hover around that pace over 2023-24, as the war
in Ukraine disrupts activity, investment and trade in the near term, pent-up
demand fades and fiscal and monetary policy accommodation is withdrawn. As a
result of the damage from the pandemic and the war, the level of per capita
income in developing economies this year will be nearly 5 percent below its
pre-pandemic trend.
The war in Ukraine, lockdowns in China, supply-chain disruptions and the
risk of stagflation are hammering growth. For many countries, recession will be
hard to avoid. Changes in fiscal, monetary, climate and debt policy
are needed to counter capital misallocation and inequality.
The June Global Economic Prospects report offers the first
systematic assessment of how current global economic conditions compare with
the stagflation of the 1970s - with a particular emphasis on how stagflation
could affect emerging market and developing economies. The recovery from the
stagflation of the 1970s required steep increases in interest rates in major
advanced economies, which played a prominent role in triggering a string of
financial crises in emerging market and developing economies.
Developing economies will have to balance the need to ensure fiscal
sustainability with the need to mitigate the effects of today’s overlapping
crises on their poorest citizens. Communicating monetary policy
decisions clearly, leveraging credible monetary policy frameworks and
protecting central bank independence can effectively anchor inflation
expectations and reduce the amount of policy tightening required to achieve the
desired effects on inflation and economic activity.
The current juncture resembles the 1970s in three key aspects:
persistent supply-side disturbances fueling inflation, preceded by a protracted
period of highly accommodative monetary policy in major advanced economies,
prospects for weakening growth and vulnerabilities that emerging market and
developing economies face with respect to the monetary policy tightening that
will be needed to rein in inflation.
However, the ongoing episode also differs from the 1970s in multiple
dimensions: the dollar is strong, a sharp contrast with its severe weakness in
the 1970s; the percentage increases in commodity prices are smaller and the
balance sheets of major financial institutions are generally strong. More
importantly, unlike the 1970s, central banks in advanced economies and many
developing economies now have clear mandates for price stability and over the
past three decades, they have established a credible track record of achieving
their inflation targets.
Global inflation is expected to moderate next year but it will likely
remain above inflation targets in many economies. The report notes that if
inflation remains elevated, a repeat of the resolution of the earlier
stagflation episode could translate into a sharp global downturn along with
financial crises in some emerging market and developing economies.
The report also offers fresh insights on how the war’s effects on energy
markets are clouding the global growth outlook. The war in Ukraine has led to a
surge in prices across a wide range of energy-related commodities. Higher
energy prices will lower real incomes, raise production costs, tighten
financial conditions and constrain macroeconomic policy especially in
energy-importing countries.
Growth in advanced economies has sharply
decelerated from 5.1 percent in 2021 to 2.6 percent in 2022. Growth is expected
to further moderate to 2.2 percent in 2023, largely reflecting the further
unwinding of the fiscal and monetary policy support provided during the
pandemic.
Among emerging market and developing economies,
growth fell from 6.6 percent in 2021 to 3.4 percent in 2022 - well below the
annual average of 4.8 percent over 2011-19. The negative spillovers from the
war will more than offset any near-term boost to some commodity exporters from
higher energy prices. Forecasts for growth have been revised downwards in
commodity importing countries as well as four-fifths of the low-income
countries.
The report highlights the need for decisive
global and national policy action to avert the worst consequences of the war in
Ukraine for the global economy. This will involve global efforts to limit the
harm to those affected by the war, to cushion the blow from surging oil and
food prices, to speed up debt relief. It will also involve vigorous supply
responses at the national level while keeping global commodity markets
functioning well.
Policymakers, moreover, should refrain from distortionary policies such
as price controls, subsidies and export bans, which could worsen the recent
increase in commodity prices. Against the challenging backdrop of higher
inflation, weaker growth, tighter financial conditions and limited fiscal
policy space, governments will need to reprioritize spending toward targeted
relief for the vulnerable population.
It is
always helpful to go back and review recession outcomes so that we can manage
our expectations. While every recession varies in terms of length, severity and
consequences, we tend to see more layoffs and an uptick in unemployment during
an economic downturn. Accessing the market for credit may also become harder
and banks could be slower to lend because they are worried about default rates.
During
a recession, as interest rates go up and inflation cools, prices of goods and
services fall. The economic outlook will also drag the stock market lower.
The general consensus is that the recession in 2023-25 may be short and will be widespread and significant.
As usual, we remind you to take your Memo Plus Gold daily. It will help to keep you alert and mentally sharp. For more information or to order for Memo Plus Gold, please visit : https://oze.my.
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.