Rising global economic uncertainties

‘Businesses, governments, and investors were already navigating a foggy global landscape before the tragic events unfolding in the Middle East. …Even in the highly unlikely event that the geopolitical situation improves rapidly in the region and beyond, a deep sense of uncertainty will remain...First, the global economy’s major growth engines are currently under strain.

With Europe teetering on the brink of recession and China stalling, the US economy has emerged as the main driver of global growth. …But even America’s growth outlook is uncertain. …Second, US Federal Reserve and other major central banks… will maintain elevated rates for an extended period.

Third, the persistence of this interest-rate outlook increases the risk of recessions and financial-market turbulence.’ – An excerpt from an October 26, Project Syndicate (PS) published article ‘The five main drivers of global economic uncertainty’ by Mohamed A. El-Erian

In the recently held annual meetings of International Monetary Fund (IMF), the managing director (MD) of IMF, Kristalina Georieva, reportedly indicated towards likelihood of continuation of shocks, which, in turn, means that the global economy will have little respite going forward.

An October 12, Guardian article ‘Shocks are new normal for weakened global economy’ pointed out the MD’s comments in this regard as ‘“Shocks are becoming the new normal for a world that has been weakened by weak growth and economic fragmentation,” she told the IMF’s annual meeting in Marrakech on Thursday.’

Back in early 2022, with the Covid pandemic quite firmly on a significantly declining path, and with a more established understanding of the fast-unfolding nature of climate change crisis, one would have wondered that the element of ‘surprise shocks’ had taken a back seat. Hence, with lesser uncertainties, clear economic policy could have been approached through a much-needed improved sense of multilateralism to hone in policy focus to tackle climate disasters, diminishing global warming, and reducing income and wealth inequality through revisionist attitude towards the neoliberal assault.

Instead, firstly, the war in Ukraine in early 2022 at the back of recession-causing pandemic significantly added to global supply shock, which, in turn, contributed to inflationary pressures; and the current serious unrest in Middle East once again has the potential for serious supply shock emanating from it, especially in case the Israel-Palestine conflict escalates more widely in the region.

The biggest ripple is likely to be in the shape of rise in oil prices, which will likely bring further impetus to already strong stagflationary consequences in many developing countries in global South, including Pakistan, and will also add to inflationary pressures in the developed world.

There is already serious concern building up with regard to an oil price shock likely on the horizon – of the magnitude not that dissimilar as seen in the 1970s when prices increased many folds quite quickly – as the conflict in Middle East prolongs, and perhaps also widens.

A recent Financial Times (FT) article ‘Oil prices could hit $150 if Israel-Hamas conflict intensifies, World Bank warns’ highlighted the concerns raised in this regard by World Bank, in its October 2023 ‘Commodity market outlook: under the shadow of geopolitical risks’, whereby the Report does not find difficult scenarios in terms of significant rise in oil price panning out, as far-fetched.

The article indicated, for instance, that ‘Crude prices could rise to more than $150 a barrel if the conflict in the Middle East escalates, the World Bank warned on Monday, risking a repeat of the 1970s oil price shock if key producers cut supplies.

In its quarterly Commodity Markets Outlook, the multilateral lender said a prolonged Israel-Hamas conflict could drive big rises in energy and food prices in a “dual shock” for commodity markets still reeling from Russia’s full-scale invasion of Ukraine.’

In terms of the different scenarios for likely rise in oil prices if conflict prolongs, the Report pointed out: ‘The Special Focus [section of the Report] presents three risk scenarios that are contingent on the severity of the impact of an escalation of the conflict on oil supply. …In a small disruption scenario, global oil supply would be reduced by 0.5 mb/d [million barrels per day] to 2 mb/d (0.5 and 2 percent of 2023 supply).

As a result, oil prices would initially increase by 3 to 13 percent above the 2023Q4 baseline forecast of $90/bbl. In a medium disruption scenario, global oil supply is reduced by 3 to 5 mb/d (approximately 3 to 5 percent of 2023 supply).

This would push oil prices about 21 to 35 percent above the baseline forecast in 2023Q4. Finally, in a large disruption scenario, global oil supply would fall by 6 to 8 mb/d (approximately 6 to 8 percent of 2023 supply). This would push oil prices about 56 to 75 percent above the 2023Q4 baseline.’

The same FT article pointed out in this regard: ‘In a worst-case scenario, global oil supply could shrink by 6mn to 8mn barrels a day, sending prices to between $140 and $157 a barrel, if leading Arab producers such as Saudi Arabia moved to cut exports.

Under small and medium disruption scenarios, prices could hit $102 to $121 a barrel, the report added. Current global oil demand is about 102mn b/d.’

Rising energy prices will once again bring greater impetus to already over-board practice of monetary austerity – given inflationary pressures have a strong supply-side determination, and therefore require a balanced approach in terms of policies to unclog supply bottlenecks, and squeezing aggregate demand – by major central banks globally while developing countries, including Pakistan, are basically following pursuit.

Elevated levels of interest rates have already produced significant economic pressures, especially for developing countries, in terms of greater squeeze on fiscal space – and at a time when greater spending is needed to fight existential threat of climate change and to prepare against likely ‘Pandemicene’ phenomenon – built-up of imported and cost-push inflationary channels, and contributed to already high debt distress.

High interest rates have also put pressure on foreign exchange reserves, and in turn local currencies at the back of competition for foreign portfolio investment (FPI), which otherwise should be avoided in favour of much more immobile, and far greater meaningful foreign direct investment (FDI).

It is important that likely increase in oil prices if conflict in the Middle East intensifies further should not be matched by further tightening of an already (wrong) over-board monetary austerity policy stance.

Indicating the depth of monetary austerity being practiced, a November 1, Bloomberg article ‘Fed Signals Yield Rise Reduces Need to Hike, But Door Still Open’ highlighted the latest monetary policy decision regarding policy rate by US Federal Reserve in the following manner: ‘The US central bank’s policy-setting Federal Open Market Committee held interest rates at a 22-year high for a second straight meeting on Wednesday. …“In light of the uncertainties and risks and how far we have come, the committee is proceeding carefully,” [Federal Reserve chair, Jerome] Powell said.

“We will continue to make our decisions meeting by meeting.” …The unanimous decision left the target range for the benchmark federal funds rate unchanged at 5.25% to 5.5%, the highest since 2001…’

Another source of uncertainty to global economic prospects could result, if China does not bounce back in terms of its rather weak economic growth performance overall for some time now.

An August 11, New York Times (NYT) article ‘China’s stalling economy puts the world on notice’ pointed out in this regard ‘For more than a quarter-century, China has been synonymous with relentless development and upward mobility. …Now that engine is sputtering, posing alarming risks for Chinese households and economies around the planet. …This week brought data showing that China’s exports have declined for three months in a row, while imports have dropped for five consecutive months…Then came news that prices have fallen on a range of goods, from food to apartments, raising the specter that China could be on the brink of so-called deflation, or sustained drops in prices, a harbinger of anemic commercial activity.’

This was the analysis by the article above back in August, but similar conclusions about the Chinese economy have been pointed out by World Bank’s October commodity report as ‘A key driver of the continued weakness in commodity prices in 2024 is weak global growth amid tight financial conditions.

Subdued global goods trade and weakness in China’s highly leveraged property sector will also weigh on energy and industrial metals into 2024. …The primary downside risk is associated with worse-than-expected performance of the global economy, particularly in China.’

Copyright Business Recorder, 2023