Double shock | Covid and war jeopardising global economic recovery 4/07/2022
for new public infrastructure in the energy sector. This will demand permanent adjustments in public revenues and expenditure. National and EU-wide loan financing for certain priority projects could be possible in individual cases but will not be able to shoulder the bulk of the adjustment costs. This means that almost all countries will have to make painful adjustments to their budgets (OECD 2022, PisaniFerry and Blanchard 2022). Financial policy can only mitigate impact Financial policy generally only has very limited scope to respond to a double shock, mainly in tweaking distribution. Stabilising aggregate demand by stimulating demand will not help counter the current supply shock. Conversely, stepping up consolidation risks snuffing out the already weakened pace of growth. Countries under particularly high inflationary pressure must also consider to what extent their fiscal course is boosting demand and therefore contributing to inflation. Governments in developing and emerging countries have so far hardly adopted any packages of measures to mitigate the impact of the shock. Most of these countries are, in fact, going the opposite way and pursuing monetary tightening in response to the United States’ turnaround on interest rates. As many countries have also seen growth and state revenues drop on account of Covid, there is very little leeway to implement measures to protect against higher energy and food prices other than those aimed at reducing poverty.
High inflationary pressure in transatlantic region The Ukraine war has fundamentally changed the outlook for inflation. Before the war, an increase in inflation rates seemed plausible given the supply bottlenecks and strong pace of growth. Since the war started, the inflationary momentum is unmistakeable with prices for energy and agricultural commodities and some metals shooting up within a very short space of time. Supply bottlenecks in the production of intermediate products have intensified further, as have the disruptions in international shipping and logistics in the wake of sanctions against Russia and the closure of Russian airspace. The situation is compounded by the problems in transport and logistics in China on account of the country’s zeroCovid strategy. In response to such a broad increase in input prices, many industries around the world first compressed their margins or curbed production. This will gradually lead to rising producer prices and, ultimately, albeit to a lesser extent, rising consumer prices. The OECD estimates that between 40 and 50 percent of the price increase will be shifted onto consumer prices. While industrialised countries only had an inflation rate of 0.7 percent in 2020, it increased to a good three percent in 2021. This year, inflation is expected to reach extremely high levels. The IMF (IMF 2022) expects inflation to reach 5.7 percent this year in industrialised countries and 8.7 percent in developing and emerging countries (1.8 and 2.8 percentage points more respectively than in January). Core inflation most recently rose to four percent among industrialised countries and five percent among developing and emerging countries. The IMF expects inflation to calm down by next year already and drop back to 2.5 and 6.5 percent respectively. The OECD anticipates inflation this year to average 6.2 percent in the United States, 6.1 percent in the euro area, and around three percent next year (OECD 2022). Inflation has risen particularly rapidly in the United States, the United Kingdom and in countries of Central and Eastern Europe. In Europe, inflation is being fuelled by surging gas prices, in particular, whereas in the United States it is the oil prices. In almost all countries, the inflation rate has
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