Policymakers should begin to think outside the dictionary to prevent an economic crisis from engulfing us because we cannot afford another economic catastrophe.
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| [MD Mahmud Hasan, Department of Criminology, University Of Dhaka] |
More than just some fearsome forecasts from pessimist economists, the global economy is once again on the verge of collapse following the COVID-19 and then the Russian madness in Ukraine. That being said, is the global economy nearing the end of its downturn or will it eventually crash? And how will the economy, particularly those of emerging countries, fare if the collapse is inevitable?
According to economists, a recession occurs when GDP
decreases for two consecutive quarters. Recessions have the same effects no
matter which economy they originate in or how long they last. When the economy
is in a slump, the central bank is coerced to raise interest rates on loans
because of excessive inflation caused by reduced output and supply. As a
consequence, businesses and investors turn their backs on bank loans, resulting
in fewer investments and fewer jobs being created in the economy. Inflationary increases in the cost of raw
materials drive existing businesses to reduce both their production and their
workforces.
The Russian invasion of the 'bread basket of Europe'
earlier this year has halted a huge percentage of the world's wheat output,
while Western sanctions on Russia, one of the main exporters of wheat, crude
oil, gas, and gold, have produced serious food and energy supply shortages globally.
As a consequence, manufacturing costs and
commodity prices have shot up; there is turmoil in the stock markets,
propelling the globe into high inflation and, eventually, a recession.
The World Bank's latest Global Economic Prospects report, released in June 2022, predicted that global economic growth will fall
from 5.7% in 2021 to 2.9% in 2022, a major decrease from the 1.1% predicted in
January. That pace is projected to continue over the next several years, as the
World Bank regards the Russian invasion of Ukraine as its prime catalyst. The
report also includes that, from 5.1 percent in 2021 to 2.6 percent in 2022,
growth in advanced countries is predicted to substantially decelerate—1.2
percentage points lower than in January's forecasts. As a result of the pandemic's fiscal and monetary
policy assistance being gradually phased down, growth is predicted to fall to
2.2 percent in 2023.
Meanwhile, in the United States, while inflation
is skyrocketing, the Federal Reserve has raised interest rates by 75 basis
points to a record high in over 30 years in a bid to curb the runaway inflation
that reached a new height of 8.6% in May. The majority of the world's central
banks are using the American approach as always, such as the Bank of England
and Swiss National Bank, to address the crisis regardless of the Bank of Japan,
but it does not seem that it will be sufficient to carry us through. For the
Swiss National Bank, it is the first interest rate hike in the last 15 years.
The US GDP was already unsteady from the beginning of
this year owing to the Omicron variant, and the Russian invasion of Ukraine
exacerbated the issue. US GDP is expected to rise 2.9 percent in 2022,
according to the IMF's most current prediction, before slowing down to 1.7
percent in 2023 and 0.8 percent in 2024. It's worth noting that the US economy
increased by 5.7% in 2021 after shrinking by -3.4 percent in the previous year.
And now there is a 'narrowing' chance that the US economy will escape the
recession, according to several analysts. According
to a Conference Board poll, 60 percent of worldwide CEOs believe their major
field of business would see an economic downturn during the next 12 to 18
months. One-fifth of CEOs feel their area has already entered a
recession. In Australia, thousands of companies have been shut down, reaching
to nearly 4 thousands in the last fiscal year, reported by news.com.au.
In the other part of the world, China, one of the
primary drivers of the world economy, saw a large number of COVID cases earlier
this year, resulting in the strictest lockdowns in major industrial cities like
Shanghai, Beijing, and Guangdong, with the Ukraine
crisis, the hit on global supply chain and the effects can be felt in every
corner of the planet.
In the realm of crypto-currency, the storm hit hard
this time. Most crypto-currencies are down except for Dogecoin at the time of
writing. Currently selling at a historic low of $20,505.13, which was
previously at $68,000 in November of last year, Bitcoin has fallen 42.5%.
Compared to Bitcoin (BTC), Ether, the second-largest crypto, has dropped more
than 35% since December 2021, and this decrease might continue in the months
ahead. This havoc in the crypto market is also affecting the mainstream
economy, while the combined crypto value is less than $1 trillion now.
The ongoing economic juncture is not and will not be
very soft with developing economies like Bangladesh, India, Vietnam, and top
FDI recipients, as the central banks of the foreign investors' host countries
keep raising the interest rates mentioned earlier. Meanwhile, inflation is
reaching new heights with record food prices. Inflation in Bangladesh hit 7.42%
in May from 6.29% in April, the highest in the past 8 years, while India’s
non-food inflation just crossed 7%. Again,
Europe and North America where inflation continues to erode buying power, are
the top destinations for the export-oriented industries (EOI) especially of
Bangladesh, India and Vietnam. In the meantime, while exports are
abating, Bangladesh and India's foreign currency reserves are being depleted by
the decline in remittances. Moreover, policymakers may be forced to rethink
their economic strategies in light of the collapse of the once prosperous Sri
Lankan and Lebanese economies.
To avoid the upcoming turmoil in the world economy,
there are some escape plans. Stopping the war in Ukraine or pulling off the
sanctions imposed on Russia might ease the current crisis, but these don’t seem
realistic enough to be implemented. "Developing economies will have to
balance the need to ensure fiscal sustainability with the need to mitigate the
effects of today’s overlapping crises on their poorest citizens," Director
of the World Bank’s Prospects Group, Ayhan Kose, said while discussing a
possible way out of the ongoing crisis.
An economic collapse occurs when an economic
depression overruns its course, and an economic depression is the result of a
severe level of recession. This is why, against the background of increased
inflation, poorer GDP, tighter financial conditions, and less fiscal policy
flexibility, policymakers should begin to think outside the dictionary to prevent an economic crisis from engulfing
us because we cannot afford another economic catastrophe.