Many countries are struggling to find a “pain reliever” for the economy, to limit risks and maintain the recovery momentum.
Supply chain disruptions due to the conflict in Ukraine, along with Russia and the West’s sanctions against each other, are believed to be part of the reason for the price increase. These are also factors that can hinder the progress of post-pandemic recovery around the world.
The report of the Organisation for Economic Co-operation and Development (OECD) states that the developments in Ukraine could cut global economic growth by more than one percentage point. This impact, if sustained, would create a severe recession in Russia and push up global consumer price inflation by approximately 2.5 percentage points. The economic damage can also be seen in European countries, as the continent relies heavily on supplies of raw materials, food and energy from Russia and Ukraine.
Among the affected countries, those that share borders with Russia or Ukraine will suffer the most economically, followed by those that depend on energy and food supplies from Russia.
German experts fear that the growth of Europe’s leading economy may decline sharply, in the context of the conflict in Ukraine showing no signs of cooling down. Even without the conflict, the German economy is already forecast to contract in the first quarter of 2022. Given the current situation, this trend would continue in the second quarter of this year.
The implications for the labour market depend mainly on Russian energy supplies to Germany. If Russia stops supplying energy, job losses in Germany are inevitable. The economic damage to Germany, in this case, would not be much lower than that of the COVID-19 pandemic.
Facing this situation, experts warn of serious consequences if Germany stops importing oil and gas, raw materials and grains from Russia while proposing to reduce value-added tax (VAT) to 0% to quickly support consumers, especially those with low income.
The UK economy is also facing great difficulties due to high energy prices. The Bank of England (BoE) has raised interest rates to 0.75% in an attempt to curb inflation. This is the third time in a row that the BoE has raised interest rates to control inflation, which is at its record high in decades.
According to the BoE, inflation is expected to rise to around 8% in April. The BoE also warned that inflation could be even higher by the end of the year. The BoE's decision came a day after the US Federal Reserve System (Fed) raised interest rates for the first time since the outbreak of the COVID-19 pandemic.
In Asia, the Bank of Japan (BOJ) has decided to maintain its monetary easing policy, keeping key policy “leverages” unchanged, in which short-term interest rates are unchanged at minus 0.1% and long-term interest rates are maintained at close to 0% to curb inflation at 2%. The BOJ also plans to continue purchasing government bonds without a limit and equities worth up to 12 trillion yen (101 billion USD) per year.
Japan's wholesale inflation rose to 9.3% in February, the highest level in 41 years. Consumer inflation is also expected to increase above 2% after April. High commodity prices have affected consumer purchasing power and corporate profit margins, weakening the economic recovery.
In the context that countries are trying to maintain growth momentum and economic recovery, Governments are recommended to mitigate the losses for the economy with “targeted fiscal support”, without fuelling faster price rises too much. Experts also recommend that central banks continue their pre-crisis policies when dealing with instability related to the conflict situation in Ukraine.
