The global economic recovery continues amid a resurging pandemic that poses unique policy challenges. Gaps in expected recoveries across economy groups have widened, for instance between advanced economies and low-income developing countries. Meanwhile, inflation has increased markedly in the United States and some emerging market economies.
As restrictions are relaxed, demand has accelerated, but supply has been slower to respond. Although price pressures are expected to subside in most countries in 2022, inflation prospects are highly uncertain. These increases in inflation are occurring even as employment is below pre-pandemic levels in many economies, forcing difficult choices on policymakers.
Strong policy effort at the multilateral level is needed on vaccine deployment, climate change, and international liquidity to strengthen global economic prospects. National policies to complement the multilateral effort will require much more tailoring to country-specific conditions and better targeting, as policy space constraints become more binding the longer the pandemic lasts.
Despite recent increases in headline inflation in both advanced and emerging market economies, long-term inflation expectations remain anchored. Looking ahead, headline inflation is projected to peak in the final months of 2021 but is expected to return to pre-pandemic levels by mid-2022 for most economies.
But given the recovery’s uncharted nature, considerable uncertainty remains, and inflation could exceed forecasts for a variety of reasons. Clear communication, combined with appropriate monetary and fiscal policies, can help prevent “inflation scares” from unhinging inflation expectations.
Sizable fiscal support continues in advanced economies, while many emerging market economies are reducing policy support this year as policy space shrinks with the duration of the pandemic. Major advanced economy central banks are assumed to leave policy rates unchanged through late 2022 though, in some cases, asset purchases are expected to be scaled back before then—a process already underway, for example, in Australia and Canada.
Meanwhile, some emerging market central banks—including in Brazil, Chile, Mexico, and Russia—have shifted to a less accommodative stance over 2021, with tightening expected in more countries over the coming quarters.
However, worsening tensions between Russia and Ukraine increasing has evoked economic hesitation and uncertainty, due to the current scenario remaining heavily in the balance. Economic sell offs, mobilisation of troops on the Russo-Ukraine border and NATO’s anticipated reactory measures will inflict devastating ramifications on the global economy. Profuse hikes in gas prices, food inflation, and the burdens of war are some of the repurcussions which could ensue should a full scale invasion be launched.
For more information on the economic setbacks of the Russian-Ukraine crisis, visit our other recent articles which are covering the issue.
Written and collated by Lakshmi Shetty
Saturday, February 19 2022