EURASIA GROUP: Inflation fears fade as Geopolitical risks rise – Analysis
Syndicated By GEO´ PRWire
Geopolitical Intelligence Network
The global inflation shock that began in the United States in 2021 and took hold worldwide in 2022 will have powerful economic and political ripple effects in 2023. It will be the principal driver of global recession, add to financial stress, and stoke social discontent and political instability everywhere.
Today’s historically high inflation comes from multiple sources. First was the Covid-19 pandemic, which prompted governments to cushion the fall in incomes with extraordinary fiscal and monetary stimulus at the same time that it disrupted global supply. Then, just as the United States and Europe were coming out of the pandemic thanks to vaccines, China doubled down on its zero-Covid policy, locking down the global economy’s most important manufacturing and shipping hubs. Finally, Russia’s invasion of Ukraine and the West’s sanctions in response put a strain on the global supply of energy, food, and fertiliser.
This unprecedented confluence of overlapping shocks pushed inflation to levels most countries hadn’t seen in nearly 50 years. At first, central bankers believed the mounting price pressures would be “transitory” and kept policy too loose for too long. Once they realised their mistake, they were forced to respond to prevent inflation expectations from becoming unmoored. The US Federal Reserve took the lead with aggressive interest rate hikes and balance-sheet reduction in 2022, prompting others to follow suit.
Though the end of the tightening cycle is now in sight, central banks will maintain a restrictive policy stance through much of 2023, undermining global demand. And global credit and financial conditions will continue to tighten beyond this year as past rate hikes work their way through the financial system with a lag.
But inflation will prove sticky despite rapidly rising interest rates, driven by continued supply chain constraints and lingering pandemic-era “excess savings”—but also, critically, by persistently high energy prices caused by the war in Ukraine that can’t be countered by monetary policy.
With tightening credit and financial conditions at a time of still-high inflation, households and companies will feel the pinch. Wary of adding fuel to the inflation fire and facing rising interest costs, policymakers in credit-worthy advanced economies will try to absorb the income risk for households and relieve cost pressures on businesses through costly energy market interventions and subsidies financed by public debt. But in some advanced economies such as the United Kingdom and Italy, and in most developing markets, comprehensive and long-lasting fiscal support measures will be too expensive. As a result, households and companies will see their real incomes erode. Learn More /…
About Eurasia Group
In 1998, Ian Bremmer founded Eurasia Group, the first firm devoted exclusively to helping investors and business decision-makers understand the impact of politics on the risks and opportunities in foreign markets. Ian’s idea—to bring political science to the investment community and to corporate decision-makers—launched an industry and positioned Eurasia Group to become the world leader in political risk analysis and consulting. Learn More /…
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