World Leaders Predict Gloomy Future for the Global Economy

Multiple threats to the global economy have surfaced the world leaders’ concern at the annual World Economic Forum (WEF) at Davos. Some say the the risk of a worldwide recession is present.

Political and business leaders gathered for the WEF at a time when the world sees an inflation rate at its highest level in decades, including major economies of the U.S., the EU and the U.K.

The soaring consumer prices have undermined confidence in governments and financial markets, prompting the central banks including the U.S. Federal Reserve (Fed) to raise interest rates.

On top of that, the consequences of Russia’s invasion of Ukraine on energy and food prices, and COVID-19 lockdowns in China with no end in sight have multiplied the worries.

Germany’s Vice Chancellor and Economy Minister Habeck said the world was facing at least four crises: high inflation, energy crisis, food poverty and climate crisis. He added that if the world tackles only one of them, it can’t solve any.

He argued that if none of the problems are solved, the world would run towards a recession with huge effects on global stability.

The IMF has cut its global growth expectation last month for the second time this year, citing the war in Ukraine. It singled out inflation as a “clear and present danger” for many countries.

European Central Bank (ECB) President Lagarde warned that growth and inflation are on opposing paths, as mounting price pressures curb economic activity and devastate household purchasing power. She argued that the war in Ukraine could act as the tipping point of hyper globalization, which could lead to supply chains becoming less efficient for a while, creating more persistent cost pressures for the economy.

Lagarde said interest rate hikes in July and September was highly likely in order for the EU to slow down inflation. She added that they were prepared to take the risk of rising borrowing costs pulling down growth.

While the economic drag from the Ukraine crisis is being most keenly felt in Europe, it is the U.S. economy that is experiencing the greatest price pressures.

The Consumer Price Index shot from near zero two years ago to a 40-year high of 8.5% in March. The Fed responded earlier this month with its largest rate hike in 22 years, half a percentage point, and Fed Chair Powell has signaled similar hikes at the next two meetings.

Key emerging markets, including China, are still expected to see growth this year, even if at a slower pace than previously estimated.

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