Global economy battered by high inflation and stalled growth

The post-COVID recovery has run out of steam and the global economy has stalled, with many countries already in recession or on the verge of an outright recession amid heightened uncertainty and growing risks. The October 2022 update of the Brookings-Financial Times TIGER indices shows that growth momentum, as well as financial market and confidence indicators, have deteriorated markedly around the world in recent months.

A series of self-inflicted wounds, from China’s zero-COVID policy to the UK’s fiscal recklessness, on top of ongoing supply chain disruptions and the protracted war in Ukraine, have drastically restricted political space. High and persistent inflation around the world, and the actions taken by central banks to contain it, are depressing economic activity, undermining household and business confidence and disrupting financial markets.

Major advanced economies such as the Eurozone, Japan and the UK have been rocked by various adverse external shocks, often compounded by slow and lukewarm policy responses, upsetting their growth trajectories. Many developed markets are now facing the combination of steep currency depreciations (against the US dollar), rising government bond yields, strains on public finances and tightening political constraints that characterize long-standing periods of economic and financial stress in emerging market economies.

Click on a country name below the composite index to view charts of the main TIGER indices by country.

The US economy is full of mixed signals. Consumer demand remains strong and employment has continued to grow at a reasonably healthy pace. At the same time, GDP growth is anemic while inflation remains high by any measure, leaving the Federal Reserve no choice but to raise rates further despite the tightening of financial conditions resulting from the appreciation of the dollar and the decline in the value of financial assets.

Energy supply disruptions are fueling inflation and limiting the growth of European economies, with the prospect of winter energy shortages hurting private sector confidence. Emblematic of the strains on the UK economy, the fall in the value of sterling reflects a combination of these adverse external circumstances, the continued fallout from Brexit and undisciplined fiscal policies. Many European countries are more concerned about populist policies that could increase risks to fiscal and financial stability.

Japan is the only major advanced economy that can afford the luxury of maintaining a flexible monetary policy as long as inflation remains contained. This could help maintain stable albeit weak growth, as the rapid depreciation of the yen has so far had no noticeable negative effects.

Emerging market economies face similar challenges to their advanced economy counterparts, including high inflation and currency depreciation, but generally have better growth prospects. Nevertheless, weak global demand and tighter financial conditions will increase pressure on developing economies running current account deficits. With a few exceptions such as Turkey, Sri Lanka and Venezuela, where widespread economic mismanagement has precipitated a currency crash, emerging markets as a whole do not appear to be at imminent risk of a balance of trade crisis. payments.

China faces a series of problems stemming from the government’s rigid adherence to a zero-COVID strategy, a faltering real estate sector and overflowing financial system strains. Inflation remains under control, although the depreciation of the renminbi against the dollar has limited the ability of the People’s Bank of China to cut interest rates. The government and the PBOC invoked a number of fiscal and monetary stimulus measures, but these had only a limited effect in boosting private consumption and investment. Export growth, meanwhile, is expected to be held back by weak global demand.

India’s economy remains a bright spot and looks likely to see strong growth this year and next. Various reforms undertaken in recent years seem to be bearing fruit, even exports are recovering as the rupee depreciates. However, controlling high inflation is proving a challenge for the central bank.

Russia’s economy has been battered by economic and financial sanctions imposed after its invasion of Ukraine, although the ruble has strengthened on strong export earnings and weak imports. Latin American currencies have done surprisingly well this year, but Brazil and many other countries in the region face difficult political environments, which could dampen domestic demand and growth, scare off foreign investors and foment economic instability.

Governments and central banks no longer have the luxury of unfettered fiscal and monetary stimulus to stabilize growth and offset negative shocks. At a minimum, governments should avoid unnecessary populist policies (especially ill-targeted fiscal measures), do what they can to overcome supply bottlenecks, and support central banks in their efforts to rein in inflation. inflation. After all, rising food and energy prices have particularly harmful effects on poor countries and on the poorest households in all economies.

Faced with limited room for manoeuvre, monetary, fiscal and other economic policies must act in concert to mitigate inflationary pressures in the short term and focus on measures likely to improve long-term growth. Easing constraints on labor supply and trade, for example, in addition to providing incentives for investments in green technologies and various forms of infrastructure, could help. Such measures are in turn essential to support both private sector demand and near-term confidence while helping to reanchor inflation expectations.

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