The effects of the current crisis are manifold, but there are two conditions that limit the problem: energy prices and inflation. The rise in energy prices was directly reflected in the rise in inflation, which in March reached 7.5% in the Eurozone and 8.5% in the United Kingdom and the United States respectively. These countries have not seen such percentages until today, at least for twenty years.
Their central banks try to react with weapons of monetary and interest rate policy, which usually find their target in peacetime, but easily fail in times of war. In particular, the interest rate policy is applied on a forecast basis. It has a precautionary nature, which aims to tame the factors that “push” prices to higher levels, such as production costs or increased demand.
The challenge for central banks is that at this juncture they are essentially chasing inflation, rather than pursuing a precautionary policy to prevent it. This is like trying to run backwards. In addition, there is a substantial contradiction. How do you contain inflation when governments are at the same time implementing fiscal support measures in an effort to relieve citizens of the heavy burden of the energy crisis?
The main question is when the “perfect storm” will end and what can one expect for the next day. In the US, EU and UK, interest rates are expected to rise further as expected in the near future. The forecasts are indeed worrying as the Fed expects the interest rate to rise close to 2% by the end of this year.
An entire percentage point higher than predicted in December 2021. Virtually the period of almost zero interest rates is over. But all circles have their end, even the vicious circles. The depth and breadth of the US and EU economies have all the prerequisites for reducing impact and gradually restoring balance.
This is evidenced by the forecasts that Western economies in 2022 will not go into negative growth. The US is projected to grow its GDP by 2.8%, while the EU is lowering its expectations, hoping to reach a GDP growth of close to 2.5%. Emerging economies are more vulnerable in times of crisis. Entering a period of high uncertainty in the international capital markets. This is not good news for economies with high public debt ratios because they have to keep two options open: to borrow at low borrowing costs and to keep debt service costs low.
Apart from the USA and the EU, there is the rest of the world. For this reason it should be noted that the effects of the energy crisis will remain felt for some time globally. The OECD in a recent study (“Economic and Social Impacts and Policy Implications of the War in Ukraine” – https://www.oecd.org/economic-outlook/) estimates that oil prices in 2022 will remain higher by 35% , gas by 85%, and grain by 90% above average before the outbreak of war.
This will affect all economies, large and small, both developed and developing. Energy is the cornerstone of all productive activities. Rising prices will affect growth rates, consumer spending, investment.
As for Russia and Ukraine, the consequences will be catastrophic to catastrophic. The IMF predicts a 50% contraction of the Ukrainian economy by 2022, before the war is over. The Russian economy will also pay dearly not only for the invasion, but also for the sanctions imposed on it. Preliminary estimates point to a recession in 2022 that will range between 10% and 15% and could worsen even more.
In the case of Russia and China, a partnership is being established that may know no bounds and, as has recently been said by the leaders of the two countries. Their economic cooperation will not only undermine the validity of Western sanctions, but will also boost trade between them, Chinese investment in raw materials, and technology cooperation, where China is now a world leader. .
All crises end in resolution The most tragic thing is that long periods of peace also lead to crises, often warlike. History teaches us that in the end everyone picks up their pieces and goes on. An English proverb, however, gives a better description that this will not be the last crisis: “The days are always darker before dawn and brighter before sunset.”
