Double shock | Covid and war jeopardising global economic recovery 4/07/2022
War and zero-Covid in China are double shock for world economy Global economic growth set to lose one percentage point The prospects for global economic growth have dimmed substantially this spring since the start of the war in Ukraine on 24 February and the repeated lockdowns in many Chinese cities, especially in Shenzhen and Shanghai. Back in January, we forecast possible growth in global economic output of around four percent, but we have now revised this to a good three percent. Given the crisis in the European and global security order and the continuing pandemic, this may well only be the start of a cycle of downward adjustments in economic forecasts. It is important to take a sober view of the situation particularly as the risks are so difficult to model. The parameters on which forecasts are based (assumptions about commodity prices and availability, the course of the war and risks of escalation) currently tend to be more important than the forecast itself. This is another sure indicator of the degree of uncertainty that neither markets or governments, private households or enterprises can manage in a professional manner. Markets fear nothing more than uninsurable major risks that are often followed by financial instability. Warnings of new Minsky moments, sudden escalations and financial crises should be taken seriously as the winds blowing through the global capital markets could well turn even more harshly. Higher risks of recession in the triad with global repercussions The mix of a double shock to supply in terms of high commodity prices and disruptions to global production through China’s zero-Covid strategy is extremely toxic. The impact on price trends and economic activity has been drastic and swift. Disruptions in the three major economic regions of the world – a turnaround in interest rates in the United States, slumps in China and the consequences of war in Europe – are reinforcing each other and are intensifying the upward pressure on prices in particular, while growth is declining rather than moving in the same direction as it would be in a conventional boom period. Economic policy can therefore only attempt to respond in a complex, shortterm way rather than provide a clear course of expansion (or stabilisation) that would build trust. All this is a recipe for market uncertainty. A further escalation in the public health or security policy situation with even greater impacts on the price and availability of commodities could easily lead to a tipping point, plunging at least one region of the triad into recession that would, in all likelihood, have largescale international repercussions (Rogoff 2022). Europe, though very robust, is particularly at risk, as the impact of the supply shock would be felt most strongly here (Eichengreen 2022). Downward adjustments as growth prospects are cropped substantially Even if the situation does not escalate further, the agenda for governments and central banks is highly complex and difficult. The war has dampened growth prospects for the EU in particular, but growth in China has also fallen far below expectations at the start of 2022. The economy of the United States has also had a weak start to the year. Many developing and emerging countries are also suffering from indirect repercussions of the war and global disruptions to supplies. Russia’s economic activity is set to tumble a good ten percent this year, while an even more drastic drop is expected for Ukraine (reduction of one third or more). Some developing and emerging countries will also suffer financial crises. Overall, global economic development is still marked by a recovery in certain service sectors following the lifting of Covid-related restrictions and a strong demand for goods but limitations on the supply side and substantially more expensive energy and agricultural
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