Pressure on growth

Despite the complicated developments of the COVID-19 pandemic, the global economy has begun to gradually recover. However, countries are still facing many risks as fuel prices and inflation increase, leading to higher commodity prices. This can lead to people tightening their wallets, slowing down the growth momentum of economies.

The Port of Long Beach in California, the US. (Photo: Reuters)
The Port of Long Beach in California, the US. (Photo: Reuters)

Strong momentum from large-scale economic stimulus packages and low interest rate policies have supported the US economy to rebound with a growth rate of 5.7% in 2021, marking an impressive recovery after a sharp decline in 2020.

According to the US Department of Commerce, the country’s GDP growth in 2021 was 5.7%, the highest growth rate since 1984. This marks an impressive recovery because just a year earlier, the US economy contracted 3.4%, the deepest decline in 74 years.

Notably, in the fourth quarter of 2021, the US economy grew by 6.9%, although it was hindered by the impact of the outbreak of the COVID-19 epidemic and the Omicron variant. However, soaring commodity prices and rising inflation also put pressure on the world's number one economy.

The consumer price index (CPI) rose 7.5% in January compared with the same period a year ago, marking the strongest increase in the past 40 years, even exceeding the experts' forecast of 7.2%. For the whole year of 2021, the US economy recorded an inflation rate of 3.9%.

Meanwhile, in Europe, the shock from gas supply disruptions has affected the value of goods and services in the Eurozone, thereby exacerbating the impact of rising energy prices for the region. The European Central Bank (ECB) issued a warning in the context of oil prices climbing to their highest level in the past seven years.

It is forecast that higher energy prices will cause economic output in the Eurozone to decrease by about 0.2% in 2022 compared to the baseline of GDP, with the strongest impact felt in the first quarter of this year.

More than 90% of the gas used in the Eurozone is imported, meaning the negative economic impact will be exacerbated if the region loses some gas supply. According to the ECB, the direct and indirect effects of a hypothetical 10% reduction in gas allocation on the corporate sector would reduce the total added value of the Eurozone by about 0.7%. The actual reduction may be even larger because the modelling does not take into account the effect of changes in energy prices.

Rising oil prices put considerable pressure on the fragile recovery of the global economy, exacerbating problems related to inflation and supply chains. The oil price shock is amplifying inflation concerns and the high possibility of a slowdown in global growth. According to a senior economist at Moody's Analytics, for every 10 USD increase in oil price, global growth will decrease by 0.1% next year.

Bloomberg Economics have said that the scenario of oil price rising to 100 USD per barrel by the end of February will lead to inflation in the US and Europe to 0.5% in the second half of this year. Previously, inflation skyrocketed in 2021, forcing the central banks of many countries, including the US Federal Reserve (FED), to find ways to control it without derailing the recovery.

In the UK, inflation has increased at a faster pace than expected, reaching 5.4% in December 2021, the highest in 30 years. Rising fuel prices has impacted the supply chain. Rising costs have pushed up the aprices of all kinds of goods, creating a heavy burden on consumers and businesses.

While many countries, especially in Europe, have not found a solution to the "energy problem", the global economy continues to remain under pressure. In order to maintain price stability and ensure sustainable growth, countries need more support tools and to implement the appropriate policies.