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Opinion

The war in Ukraine is already having an impact on the global economic outlook

economia mundial ucrania

The ordinary citizen suffers from an incessant economic bombardment on his pocket. Their purchasing power suffers as inflation rises. Russia's invasion of Ukraine and the sanctions imposed by the West, coupled with the ravages of the pandemic - for more than two years now - have unleashed the perfect storm.

When the economy worsens due to internal or external circumstances, the vote of anger, rage, discontent and frustration motivates changes that can sometimes be radical.

The elections of the last two years to date have been influenced by the management of the coronavirus pandemic and the management of the current economic and energy crisis arising from the war occupation of Ukraine.

There is a considerable global impact due to the inflation generated first by the bottlenecks in the distribution channels of goods and commodities created by the confinements, quarantines and states of alarm in the countries to contain the Covid-19 contagion; and then, the supply chains had not been fully re-established and the Russian invasion, together with the sanctions, have once again altered the distribution channels, raising the cost of all raw materials and the conflict has pushed up the price of energy.

Last April's forecasts by the International Monetary Fund (IMF) projected global average inflation of 7.4% by 2022. Emerging countries were then listed as the worst affected with an average inflation rate of 8.7 per cent.

At the close of the first half of the year, the World Bank in its Economic Outlook has begun to warn of the "risk of stagflation" with "potentially damaging" consequences for both middle-income and low-income economies.

"Global growth is projected to fall from 5.7% in 2021 to 2.9% in 2022, considerably lower than the 4.1% that was anticipated in January," said David Malpass, president of the World Bank.

What is stagflation? Stagflation is defined by the Real Academia de la Lengua - in the dictionary - as "a situation of economic stagnation, with rising unemployment and increasing inflation".

In popular parlance, stagflation is a more expensive shopping basket but with less stuff and for many families it is even more difficult to make ends meet.

The most recent moves by several central banks to raise their interest rates out of the comfort zone they have been in for many years, in some cases decades, is a sign that the current inflationary bubble in the world is no longer merely transitory: the war in Ukraine and all its collateral consequences have chronified it.

On 15 June, the US Federal Reserve moved its interest rates by 0.75 points, from 1.5% to 1.75%, the largest increase in the last three decades.

The Fed was followed by the Swiss Central Bank, which moved its rates from -0.75% to -0.25%, the first time it had raised them for 15 years, although they are still in negative territory. The Bank of England also broke its sluggishness and increased its rates to 1.25% and in July, it was the European Central Bank (ECB) that moved to increase them.

Why do central banks raise rates in inflationary times? To cool consumption. The intention is to take money out of circulation because people prefer to invest it and deposit it in financial institutions because of the incentive of receiving interest and that ultimately helps to reduce inflation.

The two fundamental arms of an economy, fiscal policy and monetary policy, often manoeuvre either to push an economy towards growth or to cool a bubble. In this case there is an inflationary bubble that keeps experts divided about its duration, whether it will be merely transitory or long; there is even discussion about its differences or similarities with the one experienced in the 1970s in various countries around the world.

The British economist Ian McLeod first mentioned this concept in a speech at Westminster in 1965 in which he addressed the economic situation at the time, which he defined as "the worst of both worlds", having stagnation and inflation at the same time. A nightmare.

The nightmare of governments, of economists, of businessmen and above all of the people. Some years ago the Big Mac Index was used to compare the price of a Big Mac hamburger in various countries and thus compare the cost of living in one place with another.

Here in Spain these days the cost of a kilogram of watermelon is used to talk about the impact of inflation: on average a watermelon costs 9 euros. The low-income Spaniard has to decide between buying a watermelon or some ham and a loaf of bread.

Downward growth

With June drawing to a close and the Ukraine effect having crept into the global village, casting a shadow over the economic course of the first quarter of the year, international organisations have lowered their expectations for world growth in 2022 and 2023. Their initial optimism in January has dissipated with the war.

"The war in Ukraine, China's confinements, supply chain disruptions and the risk of stagflation all affect growth. It will be difficult for many countries to avoid recession," Malpass said.

The World Bank argues that the current conjuncture resembles that experienced in 1970 in three respects: 1) continued supply-side shocks that favour inflation preceded by a prolonged period of highly accommodative monetary policy in advanced economies; 2) prospects for lower growth; and 3) vulnerabilities that emerging market and developing economies face with respect to the tightening monetary policy that will be needed to curb inflation.

For its part, the IMF, headed by Kristalina Georgieva, has also lowered its global GDP forecast: before the Russian invasion of Ukraine its forecast was for 4.9 per cent growth of the global economy; with the invasion it has reduced it to 3.6 per cent.

At the same time, the Organisation for Economic Cooperation and Development (OECD), represented by Mathias Cormann, estimated a world GDP of 4.5 per cent before 24 February (the date of Russia's military occupation of Ukraine); with the war in the making, it has readjusted it to 3 per cent.

As to whether there is stagflation, the IMF and the OECD say there is. The World Bank sees a certain "risk" and none of the organisations can predict the peak of this phenomenon because everything will depend on the evolution of the war. The focus is now on the results obtained in the second quarter of the year and the course of the next six months