The prolonged period of low-interest rates and low uncertainty in the geopolitical situation was considered the key factors, to help the world economy maintain stable growth for many decades. However, these important pillars have been shaken. The devastating inflation storm hit many countries, erasing many economic recovery achievements following the pandemic. Inflation rates in countries continuously hit new records.
Most recently, the Office for National Statistics of the UK said, rising food and energy prices pushed inflation in October to a 41-year high. In Japan, the inflation rate in October increased by 3.6% compared to the same period in 2021, touching the highest increase since 1982. Despite the record high, the inflation in Japan is still lower than in many other countries. Besides inflation, tensions related to the Russia-Ukraine conflict also pushed up food and energy prices.
The World Trade Organisation (WTO) Director-General Ngozi Okonjo-Iweala, emphasised that the world economy is facing many challenges and most risks come from geopolitical uncertainties and inflation. The head of the WTO said that although a recession has not been happening everywhere, some major economies could fall into this situation. British officials have just confirmed that the UK’s economy has officially entered a recession.
The Russian Federal State Statistics Service’s preliminary data showed that the country’s Gross Domestic Product (GDP) fell 4% in the third quarter of 2022, after recording a similar decline in the second quarter. Meanwhile, the financial services firm J.P. Morgan forecasted that the US economy will have a slight recession in the first half of 2023, while the US Federal Reserve (FED) is likely to continue tightening monetary policy to control inflation.
According to Bloomberg, one of the biggest challenges facing the world economy today is high inflation. Due to the more severe and prolonged global inflation than initially forecast, many central banks have aggressively raised interest rates. The FED has been the leading central bank in the fight against inflation, raising the benchmark interest rate six times in 2022, including four consecutive increases of 0.75 percentage points.
The central banks of the UK, Australia, and Canada and the European Central Bank (ECB) have also implemented similar measures. According to the World Bank (WB), it is necessary to raise interest rates to control inflation. However, many economic experts are concerned that the trade-off is the decline in GDP growth momentum, the rising unemployment and other negative effects on the stock and real estate markets.
In addition to inflation, the risks of public debt are also a burden on the world economy. Over the past four decades, global interest rates have generally remained low. According to Bloomberg, due to low borrowing costs, government debt has been increasing day by day. By 2022, the total public debt of the world's leading industrialised countries (G7) has increased to the level equivalent to 128% of GDP, from 81% in 2007.
However, as interest rates rise sharply and if the fiscal policies are not adjusted soon, several economies are at risk of falling into an unsustainable debt trajectory. About 25% of emerging markets and more than 60% of low-income countries are or are close to being exhausted by debt, said Kristalina Georgieva, Managing Director of the International Monetary Fund (IMF).
The IMF also stressed that signs warning the bleak economic growth prospects in the near future, especially in Europe, have appeared. Accordingly, the purchasing manager’s index (PMI) showed that manufacturing and service activities are weakening in most of the countries of the Group of major advanced and emerging economies (G20). In addition, the more serious energy crisis in Europe will affect the growth rate and push up inflation.
Prolonged high inflation may force countries to continue pursuing a policy of stronger-than-expected interest rate hikes, thereby tightening global financial conditions. To dispel the dark clouds that are shadowing the growth prospects of the economy, analysts are calling on countries to strengthen the rules-based multilateral trading system, solve the debt problem of developing countries, and strengthen resilience.
