Threats to the global economic recovery

As a harbinger of an economic downturn, stock markets started to shake headwinds again at the start of the week. The prospects of re-incarceration in China, the war in Ukraine, runaway inflation, the rise in interest rates tarnish the horizon. World Bank, European Central Bank (ECB), International Monetary Fund (IMF) all offer bleak prospects. Global growth forecasts for 2022 have increased from 4.1% and 4.9% to 3.2% and 3.6%. That is roughly one growth point, which corresponds to a loss for the world economy of almost 800 billion dollars. In France, according to the IMF, growth could be around 2.9% this year and then 1.4% in 2023, even though a recession has been ruled out for the time being. The storm roars.

1. The Covid plays bummer

In China, the scenes of life in an economy that is at a standstill (see opposite) related to the rise in contagion, coupled with the government’s zero-covid policy, are fueling fears of the worst. For now, ports escape restrictions and are active. Only a dozen cities in China have been completely or partially reconfigured, but the virus and its Omicron variant are spreading like wildfire. As it is now on Beijing’s doorstep, the situation increasingly resembles a repeat of 2020, when the slowdown in production, with the closure of factories, had caused, still disrupted, strong disruptions in supply chains, from the due to the heavy dependence of Western economies on intermediate goods from China.

A Covid effect that had not only caused severe shortages, forcing European factories in the automotive, electrical equipment, computers, electronic and optical products sectors to close, leading to partial unemployment of many workers and triggering an unprecedented recession. Without reaching that point, supply chain tensions threaten to fuel price increases, which stood at 4.5% in France in March.

2. War, the other threat

The war in Ukraine and the sanctions against Russia are: ” a crisis “ come “to add to a crisis”, to use the words of the IMF. According to the international organization “The impact of the war in Ukraine this year will contribute to the deterioration of the growth forecasts of 143 countries representing 86% of global GDP,” through a new revival in the prices of energy, raw materials but also food… Because the increase in energy prices has led to an increase in the prices of fertilizers and grain products: natural gas is an essential input for the production of ammonia, a common component of most nitrogen fertilizers. A phenomenon to which is added the rupture of the supply chains of corn, wheat and other grains. Result: World food prices rose by more than 33% in a year in March, the highest level according to the FAO index of agricultural food prices set by the UN. In addition to the price effect, which will have a direct impact on household consumption, a continuation of the war in the medium term could further damage household, business and investor confidence and lead to a recession cycle.

3. Brake on the press

The ongoing price increases prompted central banks to react. With an inflation target of less than 2% for the ECB and 3% for the Fed (the US central bank), the latter want to end their expansionary policy. For the ECB, it is about its net debt purchase programme, which is to circumvent the rule, by buying debt securities from private players on the secondary market, so that states can continue to incur debt. Since 2014, nearly EUR 5,000 billion in public and private debt and nearly 80% of Member States’ Covid debt has been bought up by the institution without consideration. A shift that also requires a hike in their key rate, with another salvo in May for the Fed, and a first “at the end of the year” for the ECB. So many measures that could lead to bubble bursts, a financial crash, but above all to limit investment opportunities and thus growth. In addition, this strategy could encourage states to adopt restrictive policies, such as in France with the pension reform that Emmanuel Macron wants to impose.

In this turbulent, pre-apocalyptic environment, the inhabitants of developing countries with fragile economies are on the front lines. Food expenditure represents 40% of their budget, compared to 17% in the richest countries. As a result, more than 260 million additional people could find themselves in extreme poverty by 2022, according to Oxfam’s calculations. A disaster “unprecedented since time immemorial”, continues the NGO.

However, many of these countries are on the brink of bankruptcy. “By 2022 alone, the poorest countries will have to repay $43 billion,” explains Louis-Nicolas Jandeaux (Oxfam), on RFI. So that “Several developing countries are at risk of defaulting on their debts in the coming months and will try to avoid bankruptcy while trying to maintain their essential imports. This could lead to drastic austerity measures around the world, exacerbating the already dangerous path of austerity that countries have embarked on with the support of the IMF.

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