The world economy has been going through quite a bit of struggle lately. Due to COVID-19, all major economies suffered serious difficulties, and the recovery has been costly. Things were bright in 2021 but then came an unprecedented European war. Russia’s long, seemingly protracted war in Ukraine has ushered in another set of fresh crises. Uncertainty about price and supply chains is affecting every nation. Many economists are concerned that an era of stagflation is coming soon, which means economic prospects might be gloomy in the coming years.
WHAT IS STAGFLATION?
A hybrid word conjoining ‘stagnation’ and ‘inflation,’ the term was coined by British politicians in the 1970s. Simply put, stagflation occurs when a nation experiences low economic growth, along with rising inflation. The result is a decrease in the currency value, high unemployment, and less government spending on social welfare. In these scenarios, many countries are forced to increase interest rates. This shock comes with widespread unemployment and inflation for an unknown period.
Until the 1970s, economists generally believed that inflation creates more job opportunities, and during times of recession, lower demands automatically curb inflation. Things took a different turn when the middle eastern oil exporting countries refused to export to Western importers. Rising oil prices, in turn, fueled commodity prices and lower economic growth, poor living standards, and unemployment all around the world. Increased interest rates produced inflation, and major commodity-exporting countries continued to face economic troubles till the 1980s.
This time, stagflation also has the same supply chain problem. However, demand here involves foodstuff, not only energy. Even long before the invasion, Trump’s economic war on China, the war in the Middle East and North Africa, COVID-19, and climate change have been hampering global supply chains. Massive borrowings have put economies to cut expenses, resulting in slow or stale growth. The result could be high unemployment and widespread hunger around our globe.
A SLUMP IN GROWTH
The coming stagflation of 2022-23 and possibly 2024 is the result of a continuous and long disturbance in the supply chains of energy, grain, and other commodities. The Russian invasion of Ukraine has been the most tumultuous event in recent geopolitical history. The war created long-range impacts on the fields of food and energy, sending the whole world into shortages and price hikes. Analysts forecast global growth of 2.9% in 2022. This is significantly lower, by 1.2% to be exact, than the January forecast. Some are predicting a much lower growth of 2.1% in 2022. However, the worst is predicted to come in 2023 as growth can slump to 1.5% by this time. In short, the geopolitical game over Ukraine has ushered in stagflation after nearly five decades.
The coming stagflation of 2022-23 and possibly 2024 is the result of a continuous and long disturbance in the supply chains of energy, grain, and other commodities.
The world economy was recovering in 2021 from the long pause in economic growth. But the war has curbed the growth of developed countries from 5.1% (2021) to 2.6% (2022). Some have predicted that It will fall to 2.2% in 2023. Developing states will also see a decrease from 6.6% in 2021 to 3.4% in 2022 and further less in 2023-24. It will be a decrease from the annual percentage of 4.8 in the pre-pandemic decade. Countries that are dependent on energy imports for their industries are in serious trouble as the production cost is rising fast, and so are the prices.
THE PROBLEM WITH ENERGY AND FOOD
The Russian Federation is an energy superpower and a decaying yet strong regional block. Much of its influence comes from the immense energy and food resources the country has. It’s the third largest oil producer, 2nd in natural gas production, and ranks in the top five in terms of steel and iron ore. In 2021, Russia earned more than USD 37 billion through agricultural products and fertiliser exports. One-fifth of the world’s wheat comes from Russian soil. Similarly, Ukraine plays the role of a breadbasket for many European and African countries. Both countries are among the top ten in the production of sunflower, corn, soy, barley, and wheat. Many important gas lines cross Ukrainian territory, towards central Europe. The country is also an important supplier of coal and iron ore.
Unlike the 1970s stagflation, the 2022 scenario is dominated by a game of sanctions to halt Russian advances in Ukraine. Most Western countries have put some degree of sanctions on Russian officials, businesses, and banks. Russia has been outcast from every major sports event, and its music and literature are being discouraged. At the same time, the European Union is trying to decrease its reliability over Russian energy. Germany has halted building the important Nord Stream 2 line for the same goal. The result has been unpredictable supply decisions from the Russian part, a list of unfriendly buyers who are to pay back prices in the ruble, and many more. Somehow the Russian economy has been withstanding what the West considered to be a devastating economic tool.
But consequently, energy and grain shortages have affected prices all over the world. During the peak of the COVID-19 pandemic, oil prices for the first time went negative. And just within two years, as Russian tanks rolled into Ukraine, Brent crude breached USD 100 per barrel for the first time in 8 years. Russian blockade and missile attacks have prevented millions of tons of grain stored in Ukrainian ports. As a result, food prices skyrocketed in the buyer countries of Africa. While the developed economies have the resources to tackle public unrest, developing ones are facing a tough time. Many countries, Bangladesh included, have emphasised energy cuts, fewer working hours, and various regulations to curb energy demands.
COUNTRIES THAT ARE DEPENDENT ON ENERGY IMPORTS FOR THEIR INDUSTRIES ARE IN SERIOUS TROUBLE AS THE PRODUCTION COST IS RISING FAST, AND SO ARE THE PRICES.
Experts assume the war will curb at least 5% of per capita income growth in developing countries.
RISING PRICES, FEWER REVENUES AND SOCIAL UNREST
The economic troubles may also find their root in the financial packages and stimulus programs offered to boost the economy, alongside accommodative fiscal policies. Some countries borrowed billions to relaunch economies. Corruption, mismanagement, and policy failures have increased foreign loans. As a result, many countries are trying austerity measures. Some countries, like Sri Lanka, Pakistan, and Iraq have gone through major public lashes. Governments changed, and shortages continued.
A common headache for many African and Asian countries is the massive loans they borrowed from China before COVID-19. Not all of them were economically successful. Now as the payments are being asked for, banks in emerging markets are facing liquidity problems. For example, the value of USD in terms of BDT has crossed the 100 mark – a significant rise for a country whose only major export is apparel, which will see lesser demands due to war effects in Europe. As a result, the government will increasingly find it difficult to pay back interests and continue social spending and subsidies.
SOME HOPE REMAINS
Unlike the 1970s, when the exit from Bretton Woods caused a slump in dollar value, stagflation in 2022 is in a safer condition. The dollar remains strong in the global market, commodity prices are yet under controllable situations, and organisations like the International Monetary Fund (IMF) are already handing out aid and economic prescriptions. Corruption and syndicates are still troubling the price level, but measures are expected to bring better economic stability in harder times.
