Economic Headwinds Mount as Leaders Weigh Costs of Confronting Russia

Brussels — The global economy is at a potentially tough time as rising costs, shortages of food and other commodities, and Russia’s continued invasion of Ukraine can slow economic growth and lead to a global recession. i am going.

Two years after the coronavirus pandemic and paralyzing much of the world, policymakers are tackling the following ongoing challenges: Supply chain blockage, Blockade in China Prospects of energy crisis as a nation Stay away from Russian oil and gas.. These clashing forces are beginning to worry about the global recession as some economists become aware that the economy is being hit by events in different parts of the world.

Finding ways to avoid a global slowdown while continuing to put pressure on Russia for the war in Ukraine will be the main focus of the Finance Ministers from a group of seven countries convened in Bonn, Germany this week. prize.

The economic challenges facing governments around the world could begin to shatter the united front maintained by Western nations to combat Russia’s aggression.

Policy makers balance subtle trade-offs in considering ways to isolate Russia, support Ukraine and lift its economy in the moment when prices are rising rapidly and growth is slowing. Is taking.

Central banks around the world are beginning to raise interest rates to curb rapid inflation. This could curb economic growth by raising borrowing costs and lead to higher unemployment.

Global growth is expected to slow to 3.6% this year, International Monetary Fund scheduled for AprilDown from 4.4% predicted before Russia invaded Ukraine and China invaded Zero Corona Policy..

On Monday, the European Commission released its own revised economic forecast, showing a slowdown in growth from the estimated 4% in the winter report to 2.7% this year. At the same time, inflation is expected to reach record levels, averaging 6.8% per year. Some Eastern European countries have increased significantly, with Poland, Estonia, the Czech Republic, Bulgaria and Lithuania all facing inflation above 11%.

Last week, European Central Bank President Christine Lagarde suggested that interest rates could be raised in July. This is the first move in more than 10 years.so speech In Slovenia, Lagarde compared Europe to a man who was “blowed by fate.”

Eswar Prasad, former head of the International Monetary Fund’s China division, summarized the challenges facing G7 countries: “Policymakers exacerbate inflation by tightening Russia by limiting energy purchases. They are caught up in the restraint of stunting growth. Their economy. “

“Such sanctions impose increasingly serious economic sacrifices for all the moral justifications that underpin them, which in turn could have domestic political implications for G7 leaders. “He added.

Nevertheless, the United States is expected to continue to isolate Russia and pressure its allies to provide Ukraine with more financial assistance despite its economic problems. Authorities are also expected to discuss the benefits of imposing tariffs on Russia’s energy exports ahead of the European oil embargo, which states that the U.S. could boost prices by limiting supply. .. Policy makers will also discuss whether to pressure countries such as India to lift export restrictions on key foods that have already exacerbated high prices.

Against this background, there is an increasing urgency to support the maintenance of the Ukrainian economy. The International Monetary Fund says it needs an estimated $ 5 billion a month to continue its government activities.US Congress is trying to pass a $ 40 billion aid package for Ukraine that covers some of these costs, but Treasury Secretary Janet L. Yelen said. He called on her European counterpart to provide more financial assistance.

The Treasury Minister is expected to consider other measures to provide relief to Ukraine. There is growing interest in the idea that the United States and its allies will seize some of Russia’s central bank reserves of about $ 300 billion and use that money to fund the reconstruction of Ukraine. Treasury officials are considering this idea, but are concerned about the legality of such a move and its potential to question the United States as a safe place to store assets.

Prior to this week’s G7 meeting, US officials saw first-hand the economic challenges facing Europe. Yellen admitted that the Ukrainian conflict was having a negative impact on Poland’s economy when he stopped by to meet senior officials in Warsaw on Monday. In Poland, senior officials have raised interest rates significantly to combat inflation. Poland has absorbed more than 3 million Ukrainian refugees and is facing a cutoff in gas exports from Russia.

“We have to deal with monetary tightening policies, just as we do in the world and the United States,” Yellen told reporters. “When Poland promises to spend a lot of money to enhance security, it’s a difficult balancing act.”

Recession may be unavoidable in some countries, and economists consider multiple factors in assessing a potential recession, including a severe slowdown in China associated with the continued Covid blockade. doing.

The European Commission said in its economic report that the EU was “first hit in the developed world” because of its proximity to Ukraine and its reliance on Russia’s energy. At the same time, it absorbed more than 5 million refugees in less than three months.

Deutsche Bank analysts said this week that Europe’s recession is unlikely. In contrast, Karl B. Weinberg, chief economist of high-frequency economics, said in a note on Monday that “Germany’s economy is heading into recession” as consumer demand and production are declining. I warned. Analysts at Capital Economics predicted that Germany, Italy and the United Kingdom are likely to face a recession. In short, there is a “reasonable possibility” that the wider euro area also faces one, which is defined as a decline in production for the second consecutive quarter.

Vicky Redwood, senior economic adviser to Capital Economics, warned that a more aggressive rate hike by the central bank could lead to a global contraction.

“If inflation expectations and inflation are more stubborn than we expected, and as a result we need to raise interest rates further, a recession will probably appear on the card,” Redwood wrote to clients this week. ..

The main cause is energy prices. In Germany, which relies most on Russia’s fuels among Europe’s major economies, the pressure is felt seriously not only by consumers, but also by the heavy business sector in its industry.

Martin Brudermüller, CEO of chemical giant BASF, said at the company’s annual meeting last month that Russia’s gas transport “supports the competitiveness of the industry.”

“A sudden outage of natural gas from Russia could cause irreversible economic damage and force a stoppage of production,” Brudermüller said, calling for less dependence.

The impact of the gas embargo has been the subject of lively debate among German economists and policy makers, with analyzes ranging from manageable to catastrophic. Energy flow is just one of several supply problems in the industrial sector.

Soaring food prices are another issue that has caused anxiety among the finance ministers. The Treasury will publish a report later this week outlining plans by the World Bank and other international financial institutions to combat food shortages.

Suspension of wheat exports from Ukraine and Russia, which account for 28% of the world’s exports, supply chain disruptions, and severe drought in India have also banned grain shipments and Covid-related blockades in China. Food prices are skyrocketing, especially in Africa and the Middle East, and global hunger is on the rise.

The question for both US and European policy makers is how to lock in soaring prices without putting their economies into recession. The Federal Reserve has begun raising interest rates to curb inflation in the United States, and its chair, Jerome H. Powell, has said that lowering prices will be a challenge without seriously damaging the economy as a whole. I admit it.

“It will be difficult to avoid some sort of recession,” Wells Fargo CEO Charlie Schaff said at an event hosted by The Wall Street Journal on Tuesday.

The conundrum explains that the European Central Bank is reluctant to raise interest rates. In the positive column, the European Commission pointed out that the unemployment rate in the euro area is declining and the government deficit is declining, despite rising war-related costs.

Food prices are rising around the world, but inflation levels are very different. Food inflation during the first three months of 2022 was 2.5% in France and Ireland and 10% in Eastern European countries. According to ING’s analysis last week, Turkey and Argentina had 60-70% in March alone.

In a speech to the Brussels Economic Forum on Tuesday, Mr Yellen argued that Russia’s actions reminded the state that national security should not be exchanged for cheap energy. She argued that it was important to reduce reliance on Russia and China and accelerate investment in renewable resources.

“No country controls the wind and the sun,” Yellen said. “Make sure this is the last time the world economy has been held hostage by the hostage behavior of fossil fuel producers.”

Alain Lapeport reported from Brussels and Patricia Cohen from London.