Davos Wrap-Up: Concerns Over World Economy Dominated WEF Talks

When the world’s financial and political leaders gather at the World Economic Forum in Davos last week, a gloomy global economic outlook was the primary talking point.

While some thought that many of the economic problems are geographical, particularly regarding regions that were affected the most from the war in Ukraine including Europe, others were concerned that the picture is far bleaker.

Inflation has been the primary concern of world nations, with food and energy prices have been skyrocketing as the war in Ukraine goes on and supply chain bottlenecks resume, as well as the residual effects of the pandemic. This has forced central banks to start tightening monetary policy against a backdrop of slowing economic activity.

Price hikes have begun to spill into the underlying economy, posing greater risks to global growth and causing headaches for central bank policymakers, who face the task of tightening monetary policy to rein in inflation without pushing economies into recession.

Some experts suggest that the prominence of the issues; Russia, recession and rates, depend on geography.

While the United States seems more resilient against these issues in the economy, labor market and consumer, Europe’s situation is more concerning. The U.S. consumer is sitting on $3.4 trillion of deposits. Coming into Covid, the amount was $1 trillion, so there’s some buffer there.

Europe on the other hand stands right in the middle of the war in Ukraine, as well as supply chain issues and energy crisis. A recession in Europe is likely.

Probably the biggest worry for the economy is food. IMF Managing Director Georgieva brought up the increase in food prices. She said the global economic horizon has darkened because of the war in Ukraine, tightening financial conditions and economic slowdown in China and dollar appreciation.

Georgieva added that there had been a commodity price shock everywhere, the most important of those is food price shock. “Over the last week, because of that sense that maybe the economy is getting into tougher waters, the oil price went down but food price continues to go up.” Georgieva said.

Because of its proximity to the war in Ukraine, its reliance on Russian energy and soaring food and energy prices and global supply chain crisis, economists have downgraded euro zone’s growth forecast.

Euro zone inflation hit a sixth consecutive record high in April, with the bloc notching an annual 7.5% rise in consumer prices and piling pressure on the European Central Bank to begin hiking interest rates. ECB leaders this week nodded toward rate rises at the July meeting.

Although EU officials acknowledge that the slowdown in the economy is concerning, a recession is not inevitable. European Commissioner for Economy Gentiloni argued that the EU had a good carry over from the expansion after the pandemic, so how the bloc manages the transition phase could be crucial in avoiding recession.

Still, business leaders think a recession in Europe is much more likely than in the United States. They said the economic problems could get more difficult for the continent from now on.

The inflationary environment and declining consumer confidence at a time when people would want to return to traveling and service industry could mean a recession in Europe is likely.

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