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Global economy faces ‘its biggest test’ since 2nd World War

Global economy is being brought to the edge of a precipice by number of crisis:

1. Russia’s invasion of Ukraine,

2. Rising commodity & oil prices,

3. Shortages of food and other essential &industrial products,

4. China US tensions,

5. Covid 19 since early 2020,

6. Strict lockdown in China by implementing Zero Covid policy disrupting global supply chains,

7. Fanning inflation as the cost of food and fuel jumps,

8. Ballooning Debt in many countries,

9. Rising interest rates are adding to pressure on countries, companies & households (particularly poor & middleclass) with big piles of debt

10. Disruptions in cross border payment system from the sanctions imposed by USA & Europe by weponising SWIFT

11. Climate change

Market turbulence and ongoing supply chain constraints also pose a risk. As countries battle growing dismay about the cost-of-living crisis at home, some are implementing restrictions on trade in food and agricultural products due to fear of shortages at home that can exacerbate shortages and push up prices globally. China could see its economy shrink because of the impact of Covid-19 lockdowns in Shanghai, Beijing and dozens of other cities, and the fallout of a real estate crisis. Russia’s invasion of Ukraine has compounded the Covid-19 pandemic—a crisis upon a crisis—devastating lives, dragging down growth, and pushing up inflation. High food and energy prices are weighing heavily on households around the world. Tightening financial conditions are putting further pressure on highly indebted nations, companies, and families. And countries and companies are re-evaluating global supply chains amid persistent disruptions. Since the war in Ukraine started, IMF monitoring indicates that around 30 countries have restricted trade in food, energy, and other key commodities. The costs of further disintegration would be enormous across countries. And people at every income level would be hurt—from highly-paid professionals and middle-income factory workers who export, to low-paid workers who depend on food imports to survive. More people will embark on perilous journeys to seek opportunity elsewhere.

“We face a potential confluence of calamities,”-IMF

This means that the global economy faces “perhaps its biggest test” since the Second World War.

Only international cooperation can address urgent global issues such as fixing shortages of food and other products, eliminating barriers to growth, and saving our climate. Over the past three decades, flows of capital, goods, services, and people have transformed our world, helped by the spread of new technologies and ideas. These forces of integration have boosted productivity and living standards, tripling the size of the global economy and lifting 1.3 billion people out of extreme poverty. Tensions over trade, technology standards, and security have been growing for many years, undermining growth—and trust in the current global economic system.

As per IMF, there are 4 priorities in Restoring Trust in the Global System:

1. In order to address the growing fragmentation, the IMF has called for governments to lower trade barriers to alleviate shortages and reduce the prices of food and other commodities, while diversifying exports to improve economic resilience.

2. IMF urged collaborative efforts to deal with debt, as roughly 60% of low-income countries currently have significant debt vulnerabilities and will need restructuring.

3. IMF called for a modernization of cross-border payments (system like SWIFT) with inefficient payment systems posing a barrier to inclusive economic growth. IMF estimates that the 6.3% average cost of an international remittance payment means around $45 billion annually is diverted toward intermediaries and away from lower-income households.

4. IMF called for an urgent closing of the “gap between ambition and policy” on climate change, arguing for a comprehensive approach to the green transition that combines carbon pricing and renewable energy investment with compensation for those adversely affected by climate change.

CA Harshad Shah,

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