In the United States, as in much of the rest of the world, gasoline prices jumped and stock markets plunged, with the S&P 500 index approaching a bear market, ending the week down 18 % from its high in early January after a late rally on Friday. Major retailers including Target and Walmart reported earnings and earnings below expectations this week, blaming rising costs and excess inventories that have piled up in response to supply chain issues.
“If I had to sum up: more uncertainty, more inflation, less growth,” said François Villeroy de Galhau, the Governor of the Banque de France, about the impact of the war, during a conference bringing together finance ministers and central bankers here. of the powerful industrialized countries of the Group of Seven.
After approving billions of dollars in fiscal stimulus to stave off the slowdown caused by the coronavirus pandemic, world economic leaders are now grappling with the threat of “stagflation” – slow or negative economic growth, coupled with inflation. rising.
The risks abroad may be even greater than in the United States, economists say. In Europe, the euro zone grew by only 0.2% in the first quarter of 2022, suggesting a potential slowdown. Some economies in Europe have even shrunk: that of Italy, for example, contracted slightly in the first quarter of this year.
The war poses a more serious economic threat to Europe than to the United States, especially given the continent’s dependence on Russian energy, said Jason Furman, a former economist at the Obama administration. China’s efforts to contain the coronavirus also continue to rattle the global economy, with the latest data from Beijing showing a major drop in retail spending and lower gasoline production.
Russia’s economy is faring even worse since the start of the war: the White House says it expects Russia’s gross domestic product to shrink by 15% this year due to sanctions imposed after the invasion, despite Moscow profiting from rising energy prices.
The World Bank has also warned of a “huge accumulation of debt”, particularly in the poorest countries, with debt repayments at their highest level in 20 years. Half of low-income countries are now classified as at “high risk” of debt distress, according to the Center for Global Development, a Washington-based think tank. The defaults of the poorest countries could have repercussions on global financial markets if creditors around the world are not paid.
“It’s a very difficult economic situation,” Treasury Secretary Janet L. Yellen said after Wednesday night’s conference. Yellen said the economic shocks of war, additional sanctions on Russia and further inflationary pressures were all possible. But she, like many European officials, still held out hope that policymakers would be able to handle the difficult circumstances.
The global economy, particularly in the United States, was expected to grow relatively rapidly in 2022 before the war, creating a buffer that could help avoid recession. “I think it’s conceivable that there could be a soft landing,” Yellen said, referring to the Federal Reserve’s potential to cool inflation without causing a recession.
The G-7 conference resulted in limited measures to address these emerging threats to the global economy. In closed-door discussions on Thursday and Friday, world leaders agreed to take largely unspecified steps on debt management in developing countries, global economic stability and inflation control. Their most concrete action was to pledge about $20 billion in economic aid to Ukraine.
G-7 leaders also agreed in a joint statement to take action related to Sri Lanka’s debt crisis and alleviate food shortages. They also pledged to keep international markets open, as some countries move to impose export controls to prevent scarce supplies of food and other goods from leaving their countries. World economic leaders in Bonn stressed they understood the extent of the dangers, but also acknowledged they may not be ready to address them.
A senior official from the French delegation, who spoke on condition of anonymity to describe the private meetings, said “implementation is too slow” and that world leaders need to act faster to solve the problems of indebtedness of developing countries.
“The situation of low-income states poses risks to global security and the stability of the international financial system,” German Finance Minister Christian Lindner told reporters. “We will have to deal with the situation.”
Linder later added, “It’s a risk to international financial stability, and it’s even worse if these countries run into financial difficulties. [surrounding] food security in their country.
This hunger crisis is already painful, and it could worsen as the war drags on. More than 14 million people in Somalia, Ethiopia and Kenya – half of them children – are “on the brink of starvation”, according to the International Rescue Committee. This number is expected to reach 20 million by mid-2022 without substantial global action.
At G-7 meetings, U.S. and French officials have been the most vocal about the need to address the hunger crisis, according to three people familiar with the meeting, who spoke on condition of anonymity to describe the discussions behind closed doors.
“It’s much, much worse than when the covid recession started, even if they don’t talk like that,” said Max Lawson, head of inequality policy at Oxfam International, a humanitarian aid group. . “The impact we are already seeing in the developing world is hideous and painful, and it is happening right now.”
The pressing challenges have overshadowed some of the other aspirations of Western leaders. Yellen, for example, has prioritized a reorganization of the international tax order to ensure that large corporations pay a global minimum tax. With this overhaul stalled amid objections from Poland, it did not dominate discussions at the G-7. Similarly, aggressive action on climate change – long sought by G-7 countries – also attracted less attention at this conference. Many of these issues are expected to be further discussed when G-7 leaders meet later this year.
Eswar Prasad, an economics professor at Cornell University who worked at the Federal Reserve, said national financial leaders are increasingly alarmed by global economic conditions, citing conversations he has had with ministers international finance and central bank officials. Of particular concern is that policymakers’ primary tool for dealing with economic shocks – additional stimulus to increase demand – is being largely sidelined due to high inflation and high levels of debt.
“The global economy is at a critical juncture, beset by a variety of adverse shocks,” Prasad said. “The degree of anxiety has risen enormously due to growing confidence in lower growth, adverse supply shocks and rising inflation – all of which significantly reduce policy space.”
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