As interest rates rise, central bank chiefs are looking for answers. This is the case at the annual forum in Portugal, where Federal Reserve Chair Jerome Powell and Christine Lagarde spoke. The two economists are looking for answers to the question, “Will low-inflation ever return?”
Economic fallout from the war in Ukraine
While the current situation has seen a reduction of the exodus of Ukrainians, it will not prevent the ongoing loss of jobs, as only 2% of those who had left the country have been able to secure temporary employment. Meanwhile, the collapse in the ruble’s value will bring inflation and further dent living standards. In addition, the damage to infrastructure estimated at US$80bn by early May will continue slow down the economy.
The Russians’ invasion of Ukraine has brought with it an economic shock that Moscow has grossly underestimated. Upon Russia’s 2014 invasions of Crimea and Donbas, limited sanctions were imposed. President Vladimir Putin believed he could ride the wave of sanctions from the divided West. Nor did he anticipate the shock wave that erupted, with Germany reversing its attitude toward Russia and countries like Finland and Norway suddenly obtaining NATO membership.
Economic fallout from tensions in South Africa
A third wave of pandemic is on the horizon for the country, and the tensions in South Africa are already impacting the most vulnerable groups. Food prices have skyrocketed, and nearly 39 per cent of households in South Africa are already short of money to buy their daily food. A special grant for people in distress due to COVID-19 has been canceled and food price inflation has caused a sharp increase in the number of school feeding programs. Worse, conflicts has left many farmers out of work, which has resulted in a shortage of food.
The First World War also extended the lopsided industrial structure of South Africa. The country’s manufacturing sector was small and noncompetitive, with little hope for expansion. Moreover, the secondary industrial sector was minimal, consisting of only a handful of small firms and light equipment for gold mining. Sugar-refining and soap-making were also small-scale industries.
Impact of rate hike on global growth
A rate hike by the Federal Reserve has many implications for the world’s economy and the European central bank is poised to follow. It hurts countries with high debt, rising food prices, and unvaccinated populations. Yet the action also benefits economies in developed countries that have boosted their reserves. It’s not clear how much impact the hike will have on emerging markets, which rely on foreign currency reserves to finance growth.
China’s economy is already slowing, and the government’s annual target of 6.5 percent growth will fall short. At that rate, the economy will expand only 4.3 percent this year, the slowest growth rate since the 1990s. It’s possible that a repeat of the ’70s’ stagflation could be hard on investors. This could wipe out the S&P 500 index, which is down significantly this year. If the rate hike is too steep, investors could lose 20 percent or more.