Central banks must ensure that inflation comes down without dampening demand too much, which in the long run increases unemployment.
(Photo: dpa)
China’s return to global trade will hopefully spell an end to the human suffering and economic turmoil unleashed by the pandemic. But as we learned about a year ago when Russia invaded Ukraine, shocking surprises are often not far away.
As far as the pandemic is concerned, the global economy has fared relatively well. The negative effects were less severe than initially expected and global trade was already back to pre-crisis levels by the end of 2020. But the war in Ukraine caused both new supply chain disruptions and an energy crisis in Europe.
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Today, there are still many downside risks to the near-term outlook. More geopolitical conflicts, persistent inflation and tough central bank countermeasures all point to some troubles for the financial markets. At the same time, confidence indicators such as the purchasing managers’ index are recovering. But could this be a false hope?
World trade plummeted as much after the start of the Ukraine war as it did in early 2020. If history repeats itself, we could face not just a slowdown, but a recession. There is no doubt that 2020 was a runaway year. However, some analysts believe that a recession could still come.
Central banks face a difficult balancing act
Our ability to adapt will hopefully allow for a ‘soft landing’ where the economy slows but there is no recession. The global economy has proved more resilient than expected and unemployment remains low.
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Inflation, while slowing down, still needs to fall significantly before central banks can lower interest rates.
In addition, the real impact of rate hikes is yet to be seen. It typically takes 12 to 18 months for the full impact to hit the economy.
Central banks clearly face a difficult balancing act. They must ensure that inflation comes down without dampening demand too much, which in the long run increases unemployment.
Lena Sellgren is Chief Economist at Business Sweden.
(Photo: Business Sweden)
International organizations such as the International Monetary Fund and the OECD assume that inflation in Europe and the USA will fall towards the inflation target of two percent in the next two years.
Even though central banks will be ready to cut interest rates, the long era of low interest rates we’ve seen since the global financial crisis is finally over.
All must adapt to a new economic era in which higher costs and interest rates are the norm. And when we all get used to it, demand will pick up again. It’s just about surviving another period of change.
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