The Global economic climate has been despondent since the start of this calendar year, with significantly tightening financial conditions and mounting challenges. Several factors, including decades-high inflation, falling stock markets, Covid-19 resurgence, and Russia-Ukraine tensions, are pressuring the world economy.
As per the recent world economic outlook report, global inflation is expected to rise from 4.7 percent in 2021 to 8.8 percent in 2022 before declining to 4.1 percent in 2024 if the monetary policy is sensibly calibrated.
On a further dark note, the overall global growth is forecasted to slow down from 6.0% in 2021 to 3.2% in 2022 and 2.7% in 2023. These figures represent the most stunted growth rates in the last two decades, except for during the world financial crisis and the harshest phase of the pandemic.
Raging inflation & cost-of-living crisis
Rapidly rising prices, especially of food and energy, in almost all countries, are wreaking havoc on regular households and common people. In the US, inflation has reached peak levels not seen in more than four decades; the annual inflation rate in May 2022 was 8.6%, at its highest point since 1981, as measured by the consumer price index. The recent September CPI also came out to be 8.2% over the prior 12 months, higher than what experts had predicted.
A Pew Research Centre analysis of data from 44 advanced economies states that, in nearly all of them, consumer prices have risen substantially since pre-pandemic times. This persistent inflation is a serious threat to the prosperity of the global economy as it is inducing a cost-of-living crisis and brutally impacting macroeconomic stability.
Surging interest rates, fears of recession, & tumbling stock markets
Reining in inflation has been the Federal Reserve’s top target so far in 2022. Aggressive monetary policy changes have been implemented to push inflation down to nearly 2%. Last month, the FOMC again raised rate interest rates by 75 basis points (bps) for the third time this year to tame inflation. However, this excessive tightening policy is hurting investors and also pushing the global economy into a severe recession.
Mainly due to the surging interest rates and geopolitical tensions, it’s been one of the worst years for Wall Street, where all major stock indices tumbled down. By the end of September, the S&P 500 recorded the worst year-to-date performance in 20 years. Nasdaq is also in the bear territory by losing more than 30% in value to this date. Further, the Dow Jones has lost all the gains it made in the last two years, falling back to where it was in late 2020.
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A strong dollar
The US dollar is at its strongest level in decades relative to most world currencies like the Euro or Pound, and this strong Dollar is negatively impacting the non-US economies. About 45% of the revenues of companies in the S&P 500 index are generated outside the US, and Dollar strength is detrimental to those earnings. Imports have become much more expensive for non-US countries that manage their transactions in USD.
The Russia-Ukraine clash
The Russia-Ukraine conflict is also strongly impacting the global economic landscape and its further escalation can worsen the financial crisis. The war is triggering a broad-based weaker growth, stronger inflation, and long-lasting damage to supply chains. Moreover, the US and European Union have locked horns with Russia over oil & gas supplies, which is exacerbating the energy crisis.