When the global economy is slowly recovering from multiple Covid waves at the beginning of 2022, the Russian-Ukraine war broke out in February caused a spike in commodity prices, particularly for crude oil, fertilisers, energy prices, and other industrial materials. It also caused supply chain disruptions, which led to an increase in food prices as Ukraine and Russia provide the majority of the world's food supplies.
Prior to the conflict, inflation was already on the rise due to slowdowns in the global supply chain as countries emerged from Covid lockdowns.
As food and fuel prices skyrocketed, central banks around the world were forced to raise interest rates. Major central banks began raising interest rates in March and have continued to do so until now, with indications that they will do so until December of this year.
In response to rising input costs and interest rates, businesses began raising prices of their products, which further fueled inflation. Currency depreciation has also triggered prices locally, which has shown a negative impact on government budget figures, pushing them to borrow more to finance the deficit.
On Monday, the Organization for Economic Cooperation and Development said that the Ukraine Crisis and Covid-19 pandemic have hit the global economy hard in 2022 and the stains of this will continue into the next year.
The report said economic growth worldwide was slowing more than expected as energy prices spike and the resulting inflation crisis takes its toll on demand. The group reduced its global economic growth forecast for 2023 to 2.2 percent, down from 2.8 percent in June, representing around USD 2.8 trillion in lost global output in 2023.
The OECD was particularly gloomy about Germany's Russian-gas-dependent economy, forecasting it would contract 0.7% next year, slashed from a June estimate of 1.7% growth.
According to the OECD, annual economic growth in the United States is expected to slow to around 1.5% this year and 0.5% next year. The report warned that further disruption to energy provision in the EU would push many countries into recession.
Growth in China is expected to drop to 3.2% this year. Except in 2020, when the pandemic emerged, it would be the lowest growth rate in China since the 1970s. The group projected it would rise slightly to 4.7% next year.
Meanwhile, for India, the OECD retains GDP growth projection at 6.9% for FY23, but this is lower than the RBI's growth forecast of 7.2% for the same. The Indian economy expanded by 13.5% in the April-June quarter, sequentially higher than the 4.10% in the January-March period.
On the other hand, Moody's said the global economy will grow 2.7% in 2022 and it expects growth to slow down to 2.3% in 2023. According to the rating agency, the global environment is more fragile as record-high inflation continues to gain momentum and growth decelerates. It added that stagflation risks have risen worldwide, but a stagflationary environment would take months to be realized.
Prior to this, on September 17, the World Bank warned about the possibility of a recession in 2023 due to consistent rate hikes from the major central banks, Business standard reported quoting BBC.
Raising rates makes borrowing more expensive to try to bring down the pace of price rises. But it also makes loans more costly, which can slow economic growth, it said.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.