A double crisis in three years, with stagflation on the horizon

The predictions are of stagflation and recession. The International Monetary Fund (IMF) predicts inflation and uncertainty, while the World Bank (WB) predicts increased poverty and greater financial vulnerability. Neither body is positive as long as Russia's invasion of Ukraine continues and the war persists as long as the sanctions imposed by the US and its allies.

There is a jerk in the pace of the global economy that Kristalina Georgieva, managing director of the IMF, and David Malpass, head of the WB, sum up as a dismal combination of factors and essentially one crisis followed by another; because the crisis caused by the coronavirus pandemic - it has been dragging on since 2020 and unleashed inflation that was thought to be temporary - has been exacerbated by the Russian invasion and sanctions, creating a new economic crisis whose duration is a question mark.

"Global economic activity is experiencing a widespread and sharper-than-expected slowdown, with the highest inflation in decades. The cost-of-living crisis, the tightening of financial conditions in most regions, the Russian invasion of Ukraine, and the persistence of the COVID-19 pandemic all weigh heavily on the outlook," according to the IMF's "Confronting the Cost-of-Living Crisis" paper.

Georgieva explains that in less than three years "we have faced one shock after another", first COVID, then the Russian invasion and climate catastrophes.

"These shocks have inflicted immeasurable damage on people's lives. Their combined effect drives global price increases, especially for food and energy, and causes a cost-of-living crisis. Dealing with these shocks is more difficult because of geopolitical fragmentation," she insists.

There is, Georgieva warns, a radical transformation of the global economy from the sphere of a "relatively predictable" world to a more fragile one with "more uncertainty, greater economic volatility, geopolitical confrontations and natural disasters" - in short, less stability.

At the annual autumn meeting of the two agencies in Washington (10-17 October) it became very clear that before the invasion, the outlook for global GDP orbited mainly on the behaviour of inflation; at the beginning of January there was talk of resilience and the new generation of anti-COVID vaccines, with the hope that the WHO would declare the end of the pandemic. A conventional war was not foreseen.

At the beginning of the year, both agencies agreed that the economic rebound in 2021 (global GDP grew 6%) would enter a phase of more stable growth. In January, global growth was forecast at 4.3% by the World Bank, 4.5% by the OECD and 4.9% by IMF analysts.

For the US economy, the OECD anticipated a GDP of 3.7%; 4.2% for the World Bank and up to 5.2% according to the IMF based on the effects of the stimulus and infrastructure plans of 1.2 trillion dollars.  For the eurozone, projections were 4.3% according to the IMF and the OECD; and 4.4% according to the World Bank.

Putin's war has brought everything to a halt and the WHO has not lifted the pandemic declaration either. The year that will end in a couple of months has dashed many people's hopes.

Georgieva speaks of a complex negative combination: "From 2021 to 2022, the global economy went from a crisis like no other with the pandemic to another unprecedented shock with the war".

With these new conditions, the IMF is again correcting downwards its growth forecasts for 2022: global GDP at 3.2% and global inflation of 8.8% mean dangerous stagflation because economic growth is marginal and in some countries it will enter negative territory but inflation will be above - single or double digits - of GDP.

By 2023, the IMF estimates a global GDP of 2.7% with an average inflation of 6.5% and the epicentre of the contraction will be in the advanced economies.

"We face major challenges: rising risks of recession, cost of living crisis, food crisis, Russia's war in Ukraine. Policymakers need a firm hand to avoid mistakes," Georgieva stresses.

For some months now, central banks in many countries have moved out of their comfort zone of zero or low rates as a strategy to foster economic recovery over the past decade.

The enemy to beat is inflation. Central banks are raising interest rates by pursuing orthodox monetary policy in order to cool the economy by squeezing consumption and credit.

Raising interest rates is a kind of Russian roulette. As Georgieva said on her Twitter account: "As central banks around the world have raised interest rates to curb inflationary pressures, financial conditions have tightened and risks to financial stability have increased substantially".

Nor does Malpass hide his concern.  In an interview with CNBC he acknowledged that "we are at the point of having to worry" that there will be a global recession in 2023 on the current trajectory.
The WB chief warned that as economic conditions worsen there will be additional pressure on poverty and on more vulnerable people. Many businesses are at risk of disappearing.

The pandemic had already disrupted supply chains for several raw materials not only necessary for the primary production sector, but also for intermediate goods that are not arriving as quickly as usual, which is affecting key sectors such as the automotive industry.

The labour market has not yet fully recovered pre-pandemic employment and occupation levels. The International Labour Organisation (ILO) estimated the destruction of jobs to be close to 125 million.

While on 11 October, Georgieva announced the worsening of world growth, the value of the euro against the peso continued to plummet; on that day, it took 19 pesos and 49 cents to buy one euro, and last February, it took 26 pesos. The weakness of the single European currency is a clear symptom of the fact that Europe is the epicentre of the current economic crisis, firstly because of the Russian invasion of Ukraine and secondly because of the catastrophic consequences of a historic accumulation of sanctions imposed on Russia by the United States and its European and Asian allies.

With each rung climbed and an enraged Europe supporting Volodymir Zelensky's government with military equipment, weapons and military intelligence, Russia's counter-response has - as expected - struck at the heart of Europe's weakness: its enormous energy dependence on Russian oil and gas, but also on Ukrainian and Russian grains and cereals.

In the run-up to the long European winter, Putin is playing his trump card and will want to punish Europeans by letting them freeze and starve to death without gas or electricity. Hitler and his Nazi troops used the same old strategy when they tried to take Stalingrad in that bloody siege of hunger and cold that ended on 2 February 1943.

And while the arrival of winter is regarded with uncertainty (and fear), the world economy is cooling down not because of winter, but because of the invasion, which has become a war of geopolitical and geo-economic interests, a power play between the Kremlin and the White House. No one is quite sure how to end it any more, nor how it will end.

In its most recent IMF rebalancing, at least a third of the world's economies will enter recession, a majority of which will have serious problems of marginal or negative growth in the face of single or double-digit inflation.

Stagflation is one of the most damaging economic disorders to the labour force and to the social fabric because it is a destroyer of income and welfare.  It is a cannibal of purchasing power and forces central banks to spiral up rates trying to rein in the monster and the consequence, just around the corner, is a financial crisis with banks failing, families losing their mortgages and homes, financial meltdowns, foreclosures and government bailouts. The destruction.

In 2023, a series of economic, monetary and fiscal policy measures will have to be taken to soften the fall and endure the duration of the war, which the markets themselves have already begun to discount.

The eurozone will have a marginal growth of 0.5% but two very important economies will enter recession, Germany, the European locomotive, would fall by 0.3% and Italy, its GDP, would fall by 0.2%.

The emerging economies will be better off in both 2022 and 2023: if in 2022 the advanced economies will grow by an average of 2.4% and 1.1% in 2023, the emerging economies will have an average GDP of 3.7% this year and 3.7% next year.

Meanwhile, Washington, determined to pull Putin through all the pressure of sanctions and military aid to Ukraine, will only grow by 1.6% this year and 1% in 2023; the Chinese economy will grow by 3.2% in 2022 and 4.4% in 2023. The most envied will be India, with an estimated GDP of 6.8% in 2022 and 6.1% in 2023 and within Latin America, Mexico will grow by 2.1% this year and is expected to grow by 1.2% next year, very much in line with the US economy.

What will happen to the Russian economy? More than eight extremely tough rounds of sanctions of all kinds have been imposed by Washington and its allies in an attempt to isolate Russia. However, the Russian economy is reportedly falling by 3.4% in 2002 and 2.3% next year; proof that the punishment has been harsher for the US and especially the eurozone than for Russia itself.

Sanctions have been a fiasco. Not only in February did European leaders decide to shoot themselves in the foot, but several months later, the shot has already been taken in the other leg and has left the European economy limping towards recession with Europeans thundering their fingers with uncertainty in the background.

There is little talk of peace and much talk of weapons. At an extraordinary telematic meeting of the G7, with the EU and President Zelenski, the convened leaders warned Putin that he will be held accountable and agreed on further arms shipments. Washington said it will give Ukraine Nasams air defence systems and Germany IRIS-T anti-aircraft equipment.

While a group of Western leaders continue to confront Putin emboldened by arming Ukraine to defend itself against the invader, people in Europe are very nervous about their immediate future.  For one, the long winter of uncertainty over gas, electricity and heating supplies that are already being paid for at rock-bottom prices. It is not only the economy that is freezing, but also hopes... recession means hunger.