G7 leaders warn of economic dangers fueled by gas prices, food shocks, wars, inflation

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BONN, Germany — This week, the financial leaders of the world’s most powerful country warned that the global economy could slow as the threat posed by Russia’s invasion of Ukraine continues to multiply.

Globally, the war has caused energy and food prices to soar.In the US, UK and Europe, central banks determined to curb inflation are taking steps to raise interest rates, potentially pushing countries towards economic recession. In addition to the growing hunger caused by the war, developing countries are also facing an emerging debt crisis.

In the United States, as in most of the rest of the world, Gasoline prices soar Stocks tumble, S&P 500 close to a bear market, which closed the week down 18% from its early-January peak after a late Friday rally. Big retailers including Target and Walmart reported lower-than-expected earnings and profits this week, blaming supply chain issues that have led to higher costs and excess inventory.

“If I had to sum it up: more uncertainty, more inflation, less growth,” François Villeroy de Galhau, governor of the Bank of France, said in a statement. A meeting of finance ministers and central bank governors here spoke of the impact of the war from the powerful G7.

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After approving trillions of dollars in fiscal stimulus to prevent recession from recession coronavirus Amid the pandemic, world economic leaders are now grappling with the threat of “stagflation” — slow or negative economic growth coupled with rising inflation.

Economists say the risk could be greater abroad than in the United States. In Europe, the euro area grew by just 0.2% in the first quarter of 2022, hinted at a possible slowdown. Some economies in Europe even contracted: Italy, for example, contracted slightly in the first quarter of the year.

Jason Furman, a former Obama administration economist, said the war poses a bigger economic threat to Europe than the United States, especially given the continent’s dependence on Russia for energy. China’s efforts to contain the coronavirus also continued to disrupt the global economy, with the latest data from Beijing showing a sharp drop in retail spending and a drop in gasoline production.

Inflation drives up prices at gas stations and grocery stores. Experts explain what’s causing inflation and how long it’s likely to last. (Video: Sarah Hashemi, Hadley Green/The Washington Post)

Since the war began, however, Russia’s economy has fared worse: The White House said it expects Russia’s gross domestic product to shrink by as much as 15% this year due to sanctions imposed after the invasion, even as Moscow has profited from higher energy prices.

The World Bank also warned of a “substantial increase in debt”, especially in the poorest countries, with debt payments reaching their highest level in 20 years. Half of low-income countries are now classified as “high risk” of debt distress, according to the Washington-based think tank Center for Global Development. Defaults in poorer countries could have knock-on effects across global financial markets if creditors around the world are not paid.

“This is a very difficult economic situation,” Treasury Secretary Janet L. Yellen said after the meeting on Wednesday night. Yellen said economic shocks from the war, additional sanctions on Russia and further inflationary pressures were all possible. But she, like many European officials, still has some hope that policymakers can handle difficult situations.

The global economy, especially the U.S., was expected to grow relatively quickly in the prewar 2022, creating a buffer that could help avoid a recession. “I think a soft landing is conceivable,” Yellen said, referring to the Fed’s potential to cool inflation without causing a recession.

Energy price surge sweeps Europe on war fears

The G7 meeting has taken limited action to stem these emerging global economic threats. In closed-door discussions on Thursday and Friday, world leaders resolved to take largely unspecified actions on debt management in developing countries, global economic stability and reining in inflation. Their most tangible move was a pledge of some $20 billion in economic aid to Ukraine.

G7 leaders also decided in a joint statement to take action related to Sri Lanka’s debt crisis and alleviate food shortages. They have also pledged to keep international markets open as some countries take steps to impose export controls to prevent scarce supplies of food and other goods from leaving their countries. World economic leaders in Bonn stressed that they understood the magnitude of the danger, but also acknowledged that they may not be prepared to address them.

A senior official of the French delegation, who asked not to be named, described the closed meetings, saying “implementation is too slow” and world leaders must address developing countries’ debt challenges faster.

“The situation in low-income countries poses risks to global security and the stability of the international financial system,” German Finance Minister Christian Lindner told reporters. “We’re going to have to deal with this situation.”

Lind later added: “This is a risk to international financial stability, which will get worse if these countries are in financial distress. [surrounding] food security in their country. “

The hunger crisis is already painful, and it may get worse as the war drags on. More than 14 million people – half of them children – in Somalia, Ethiopia and Kenya Yes “On the verge of starvation,” according to the International Rescue Committee. Without substantial global action, this number is expected to rise to 20 million by mid-2022.

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During the G7 meeting, U.S. and French officials were the most vocal about the need to address the hunger crisis, according to three people familiar with the discussions, who asked not to be named when describing the closed-door discussions.

“Even if they don’t talk like they are now, it’s much worse than when the Covid-19 recession started,” said Max Lawson, head of inequality policy at humanitarian aid group Oxfam International. “We’re already seeing this in developing countries. The impact is horrific and painful, and it’s happening right now.”

The pressing challenge has pushed other aspirations of some Western leaders to the background. Yellen, for example, has prioritized rearranging the international tax order to ensure big corporations pay the world’s lowest taxes. Reforms have stalled due to Polish opposition, which did not dominate discussions at the G-7. Likewise, aggressive action on climate change, long sought by the G7, received little attention at this meeting. Many of these issues are expected to be discussed further when G7 leaders meet later this year.

Eswar Prasad, an economics professor at Cornell University who has worked at the International Monetary Fund, said financial leaders are increasingly concerned about the state of the global economy, citing his discussions with international finance ministers and central bankers. dialogue. Of particular concern is that policymakers’ main tool for dealing with economic shocks – additional stimulus to boost demand – has been largely on hold due to high inflation and high debt levels.

“The global economy is at a critical juncture, plagued by various adverse shocks,” Prasad said. “Anxiety levels have risen sharply as confidence in slowing growth, adverse supply shocks and rising inflation — all of which significantly reduce room for policy manoeuvre.”


An earlier version of this story incorrectly stated that economics professor Eswar Prasad worked at the Federal Reserve. He worked for the International Monetary Fund.

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