The fragility of global economic growth | Economic newspaper

As soon as the world came out of the Corona crisis and dealt with its effects, the Ukraine war and its consequences began to cast a shadow on the global economy. The outlook for global economic growth was optimistic, with the spread of vaccination campaigns against Corona last year. Specialists’ hopes were raised for a strong recovery over the past year and continued good economic growth this year. After the outbreak of the Ukrainian war, the rise in energy, food and metal prices, and the decline in the supply of many important inputs such as electronic chips and fertilizers, economic aspirations began to tend to be pessimistic, and some feared the decline in global economic growth rates to fragile levels and an increase in inflation rates. Most of the economic outlook lowered their previous forecasts for global economic growth to low levels. The World Bank recently warned of the high risks of stagflation or stagflation.
The World Bank expected at the beginning of this year that the global economic growth rate would reach 4.1 percent in 2022, but it has finally come back and lowered its forecast to 2.9 percent. This rate is significantly lower than last year’s 5.7 percent. The growth rates of developed countries will be slightly lower than this rate, while the developing countries as a whole will register a slightly higher rate. The decline in global economic activity growth prospects is not limited to this year, but extends to the next two years, which will record growth rates close to the current rate. The decline in aspirations comes naturally as a result of the negative effects of the Corona crisis and the Ukrainian war, which disrupted significant proportions of economic activities, investment flows and global trade.
Economic growth rates will decline in most countries of the world, but will appear stronger in some of them. It is expected that many countries will suffer economic stagnation and a significant decline in economic growth rates. Some sources suggest a decrease in per capita GDP rates in
Developing countries by five percentage points compared to their pre-pandemic counterparts. This decline will generate many negative effects on the livelihood of the population, which will raise the risks of political unrest and instability in a number of countries. What is happening in a country like Sri Lanka is an example of the effects of the global economic downturn and rising energy and food costs. Many low-income countries will have real dilemmas in providing sufficient food for their populations, due to their diminished ability to pay high import costs.
Some developed countries, especially European ones, face high risks of partial disruption of energy supplies, which threatens their economic growth. The risks of recession rise with the high rates of dependence on Russian energy exports, and the German economy, the strongest European economy, is at the forefront of countries that may enter into an economic recession. Given the importance of the European continent to global trade and investment, the countries linked to it and close to it will also be affected by the decline in European economic activity. This largely explains part of the decline in the euro rates to levels close and perhaps lower than the dollar in the coming months. The highest rates of economic decline will be recorded in Ukraine, and the Russian economy will contract, due to economic sanctions, which in turn will affect economic growth rates in Central Asian countries.
High inflation rates force countries to adopt tight monetary and fiscal policies, which reduces their ability to stimulate economic activity. It seems that there is a great similarity between the inflation taking place today and the inflation of the seventies of the last century. Much of the current inflation is due to the supply shock caused by rising fuel and food prices, some basic inputs, and supply chain dilemmas. The inflation of the 1970s was caused mainly by the supply shock, lasted for several years and was curbed by raising interest rates and braking the major global economies. Central banks – more experienced, skilled and independent than before – will return to tighten monetary policies again to tackle the problem of inflation.
The Federal Reserve and a number of major central banks began to raise interest rates and reduce liquidity, and these policies will continue until inflation indicators begin to decline. It is likely that these policies will not succeed in reducing inflation rates until major economies enter recession, which will lead to significant negative effects on global trade and investment. In general, a rise in core inflation rates above 4 percent will lead to fiscal and monetary tightening policies that will lead to economic stagnation. The higher the inflation rates, the higher the risk of entering an economic recession at a later time.
Given the high levels of national debt, any increase in interest rates will push the debt servicing costs in the developed countries to unprecedented levels and thus limit their capabilities for financial expansion and dealing with economic stagnation. On the other hand, net foreign investment flows to developing countries will decline, and developing countries with high foreign indebtedness will face huge financial risks and find great difficulties in paying their obligations. As for the rise in energy prices, it will be in the interest of the Gulf region, including the Kingdom, and the benefits of higher energy prices will outweigh the costs of rising prices of raw materials, food and imports in general. Therefore, the region is likely to be – God willing – one of the few places less affected by the decline in global economic conditions.