IF you are closely following economic and political developments in the world, you won’t miss the signs that the global situation is going to worsen before it gets better. The war in Ukraine is not going to end soon, so expect food and fuel crises to worsen. Sharply rising commodity prices have been the most immediate economic impact of Russia’s unprovoked and unjustified military aggression against Ukraine. The whole world suffers.
Inflation in the European Union is seen reaching a record high of 7.5 percent in April. Surging energy cost is the major factor driving inflation in the EU. Last month, energy prices surged 44.7 percent, up from 32 percent in February.
From Bloomberg: “UK inflation rose to its highest level since Margaret Thatcher was prime minister 40 years ago. Consumer prices surged 9 percent in the year through April, the fastest rate since March 1982, the Office for National Statistics said Wednesday in a report that marked a bleak moment for living standards. The increase is more than double the pace of basic wage growth, squeezing consumer spending power at the sharpest pace on record. The pain is set to intensify, with the Bank of England predicting double-digit inflation by October when energy bills are almost certain to jump again.”
In China, the world’s second largest economy, Covid outbreaks in key cities underscore the challenges the government is facing in implementing its Covid Zero strategy. The risk of more pandemic curbs gives a bleak outlook as lockdowns have already taken an enormous toll on the economy and global supply chains. Last month, economists projected China’s economyto grow 5 percent in 2022. Goldman Sachs analysts on Wednesday cut their China gross domestic product forecast to 4 percent from 4.5 percent after weak data in April.
From the Associated Press: “Chair Jerome Powell on Tuesday underscored the Federal Reserve’s determination to keep raising interest rates until there is clear evidence inflation is steadily falling—a high-stakes effort that carries the risk of causing an eventual recession.” Observers said Powell’s remarks point to the Fed implementing a series of rate hikes that could amount to the fastest tightening of credit in more than 30 years.
This is another bad news for developing countries like the Philippines because higher US interest rates would spur capital toward the greenback. A strong dollar will hound the global economy, driving up borrowing costs and stoking volatility in financial markets. The Philippines will feel the pain of a strong dollar in the form of surging import costs, further fueling inflation rates.
“The Fed’s rapid pace of rate hikes is causing headaches for many other economies in the world, triggering portfolio outflows and currency weakness,” said Tuuli McCully, head of Asia-Pacific economics at Scotiabank.
News headlines: “Sri Lanka enters default and warns inflation may surge to 40 percent.” “New Zealand plans to spend $630-M to ease inflation pain.” “Economists cut China growth forecasts as lockdowns hit economy.”
Global growth will essentially flatline this year as Europe falls into recession, China slows sharply, and US financial conditions tighten significantly, according to a new forecast from the Institute of International Finance.
With the Philippines’s above-target 4.9 percent inflation rate in April, economists predicted that a rate hike could be on the table. True enough, the Bangko Sentral ng Pilipinas raised interest rates by 25 basis points to 2.25 percent on Thursday, as inflation continues to heat up while economic recovery picks up speed. Monetary tightening could alleviate price pressures, but at the cost of further domestic economic pain.
Most economists agree that the global streak of high inflation is far from over. The challenge for the next administration is how to tread carefully between controlling inflation and giving the Philippine economy enough stimulus to recover.