Why Central Banks Aren’t Worried About The Global Economy Despite All The Warfare
Whether you’re filling up your tank or grocery cart, you’ve probably felt the sting of inflation in your wallet. The war between Russia and Ukraine has exacerbated food prices, but that’s not the full story. Inflation, driven primarily by the post-economic boom after the Covid pandemic, has seen prices rising out of control. Governments and central banks are enacting anti-inflationary policies to help combat these issues.
In this article, we’ll take a look at the impact of the war on the global economy, what leaders are worried about with regard to the economy, and how governments are reacting to help curb inflation.
The Global Economic Impact of the War in Ukraine
When Russia invaded Ukraine in February of 2022, no one was quite sure how it would play out. Months later, Russia continues to advance in Ukraine, and the effects of the war are being felt across the globe. One of these impacts has been driving more and more people into poverty around the globe. In reality, post-Covid recession inflation is actually the primary concern. The war between Russia and Ukraine is just merely exacerbating an already struggling global economy.
The United Nations Development Program (UNDP) found that more than 51.6 million people fell into poverty in the first three months after the war. These people were living off of $1.90 or less every day. Western sanctions on Russia and disrupted supply chains throughout Ukraine have led to port blockages driving up the cost of wheat, sugar, and cooking oil. Despite these acute problems directly related to the war, the cost of goods and commodities has already been rising since Covid restrictions began to ease.
The Real Global Economic Threat
The real global economic threat faced today is rapidly increasing inflation. Underlying inflation trends from the Eurozone, UK, and the US, reveal the composition of this inflation. The US, for example, is still experiencing a red-hot labor market. Ultimately, this labor market is one of the key drivers of inflationary problems in the US. Worse still, inflation of this type doesn’t usually disappear without some kind of intervention.
Comparatively, the Eurozone and UK are experiencing inflationary problems as a result of energy prices being driven higher. Some of this can be attributed to European reliance on Russian natural gas, but also newly enacted green energy policies are also driving up the cost of energy.
Developing economies and the global south, however, are among the countries worst hit by inflation and supply chain disruptions in Ukraine. Countries such as Haiti, which depend on foreign imports, like wheat, are already experiencing some of the worst inflation and price hikes around the globe.
Can Central Banks Save the Global Economy?
The Bank for International Settlements recently urged prioritizing inflation above any other goal. In an annual report, the BIS observed that the Covid recession and following expansion have created a situation where there are high inflationary pressures in addition to other elevated financial vulnerabilities.
When the pandemic occurred, economies ground to a halt due to lockdowns and policies that put the clamp on consumer spending, crippled supply chains, and minimized demand causing factories to close down. Once all of these restrictions were lifted, economies saw huge upshots in housing prices, stock markets, and wages. Pandemic policies of low-interest rates, high government spending, and stifled demand caused an explosion in economic activity.
Consumers have been feeling these problems since 2021. Small businesses especially have been faced with cash flow problems. Even without hard data, everyone can see how prices increase week by week.
In May, the US saw inflation climb to 8.6%, the highest in four decades. In Europe, inflation reached 8.1%. In order to combat this inflation, central banks across the globe have begun raising interest rates in order to bring them back towards a 2% benchmark. Combating inflation by hiking interest rates can have negative consequences, though. The duty of the Fed, and other central banks, is to combat inflation without triggering a full-blown recession.
What Policies are Central Banks Implementing to Stop Inflation?
The primary tool for combating inflation, from an institutional standpoint, is raising interest rates. In June, the Federal Reserve raised its benchmark interest rate by 75 basis points to 1.5%-1.75% in June, with another expected to come this July. The Fed anticipates a range of 3.25%-3.5% by the end of the year.
Similar measures are being taken by other central banks that are also raising their rates. Interest rate increases work like an economic tax and can help bring balance to the supply and demand of goods in the market.
These rising rates can have a wide range of impacts across the economy, though. Banks and other lenders often use the Fed as a benchmark for establishing their own interest rates. If you have a small business loan or a business checking account, this can impact you. When interest rates on things like mortgages, credit cards, and other types of debt rise, it means less money consumers can spend in other areas, thus reducing demand.
The Threat of a Recession Still Exists
One issue with hiking rates, whether it’s slow or quick, is that they can trigger a recession. Currently, unemployment is at around 3.6%, but too much change could send that higher to 6%. Experts argue that it’s unlikely that a recession will occur. 80% of US small businesses believe they could withstand a US recession.
The key here is that central banks are trying to navigate a soft landing versus a hard landing. A hard landing occurs when an economic slowdown or downturn occurs after a period of rapid growth (i.e., a recession). In a soft landing, the government is able to reduce inflation without harming jobs or causing too much economic pain for consumers.
Despite assurances that no recession will occur, tech stocks have been rocked in recent months, with huge layoffs and even rescinding offers in the case of Twitter, Redfin, and Coinbase. In any case, central banks are working their hardest to ensure that inflation is brought under control without making things worse. Global foreign direct investment has recovered to pre-pandemic levels, but as the economy slows, this too could change.
Even with the continuing war between Russia and Ukraine, economic pressures persist because of inflation. Central Banks across the globe are enacting policies to help combat inflation and prevent damage to consumers from getting worse. Experts believe interest rate hikes can help combat out-of-control inflation that is sending millions into poverty.