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Shock Waves Hit the Global Economy, Posing Grave Risk to Europe

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Russia’s invasion of Ukraine and the continued impact of the pandemic have held countries all over the world on their toes, but a relentless series of crises hit Europe hardest, with sharp rises in energy prices, highest inflation , poses the greatest risk of recession. .

The aftermath of the war threatens the continent with fears that it could become the most difficult economic and financial crisis in decades.

Capital Economics Group Chief Economist Neil Shearing said while global growth is slowing, “in Europe it’s worse overall due to a more fundamental downturn.” increase. Real incomes and living standards are declining, he added. “Europe and the UK are just getting worse.”

Several countries, including Germany, the region’s largest economy, have built decades of dependence on Russia’s energy.of 8x increase The rise in natural gas prices since the war began poses a historic threat to Europe’s industrial strength, living standards and social peace and cohesion. Plans are in place for factory closures, rolling blackouts, and rationing in case of severe shortages this winter.

Ian Goldin, professor of globalization and development at the University of Oxford, said the risk of falling incomes, rising inequality and rising social tensions could lead to “not just a fragmented society, but a fragmented world”. said to be sexual. “We haven’t faced anything like this since the 1970s, and it’s not going to end anytime soon.”

Other parts of the world are also under pressure, but some of the causes and outlook are different.

Higher interest rates, aggressively deployed to keep inflation in check, are shrinking US consumer spending and growth. Still, the U.S. labor market remains strong and the economy is moving forward.

China, a powerful engine of global growth, Europe’s major export markets Just like automobiles, machinery, and food, we face a variety of problems. Beijing’s policy to keep all activity frozen during the Covid-19 outbreak has repeatedly paralyzed large parts of the economy and fueled disruptions to global supply chains.In the past few weeks alone, dozens of Cities and over 300 million people are under full or partial lockdown. Extreme heat and drought are crippling hydroelectric power, forcing factory closures and rolling blackouts.

A troubled property market is adding to China’s economic instability. Hundreds of thousands of people are refusing to pay their mortgages. This is because the developer has lost confidence in providing unfinished housing units. Trade with the rest of the world took a hit in her August, and although overall economic growth is likely to outpace that of the US and Europe, this year is her slowest pace in a decade. It looks like it’s going to fall into. The outlook has prompted China’s central bank to cut interest rates in hopes of stimulating the economy.

“The global economy is definitely slowing,” said Gregory Daco, chief economist at global consulting firm EY-Parthenon. But it’s “happening at a different speed”.

Elsewhere in the world, countries that can supply critical materials and commodities, particularly energy producers in the Middle East and North Africa, are seeing windfall gains.

and with India Indonesia It is growing at an unexpectedly fast rate as domestic demand increases and multinationals look to alter their supply chains. Vietnamare also benefiting from manufacturers shifting operations to their shores.

Still, China, the Eurozone, and the United States together account for about two-thirds of the planet’s economic activity, and if all these giants slowed down, it’s unlikely that any of them would remain isolated from the fallout. It gets harder.

Poor people, who spend most of their gross income on food and energy, are the hardest hit.

In Europe, frigid living rooms, closed production lines and head-turning energy this week after Russia’s state-owned energy company Gazprom declared it would not resume the flow of natural gas through its Nordstream 1 pipeline. Fears over charges have risen this week, until Europe lifts Ukraine-related sanctions.

According to Rystad Energy, average daily electricity prices in Western Europe are at record levels, with prices exceeding €600 ($599) per MWh in Germany and over €700 in France, with peak rates of It reaches as high as 1,500 euros.

in the Czech Republic generally The 70,000 angry protesters, many of whom have ties to far-right groups, Last weekend, they gathered at Wenceslas Square in Prague to demonstrate against rising energy prices.

German, French, Finnish The government has already stepped in to save the country’s power companies from bankruptcy. Still, Germany-based Uniper, one of Europe’s largest buyers and suppliers of natural gas, last week lost more than 100 million euros a day due to rising prices. said.

The cost of all these measures would be enormous at a time when government debt levels are already staggering. Concerns about dangerously large debt International Monetary Fund This week we will publish proposals to reform the European Union’s framework on government public spending and budget deficits.

Yet there remains a ruthless and unshakable reality. That is, there is a shortage of energy available to the country.

At current prices, food, home heating, garage doors, tampons, bicycles, baby formula, wine glasses, and more than consumers want.

The roots of the shortage go back to before the war in Ukraine.

Sven Smit, senior partner at consulting firm McKinsey & Company, said commodity prices began to rise in 2020 as countries began to move away from pandemic restrictions. In the United States alone, consumers were effectively buying $1 trillion more than expected based on their spending patterns before the coronavirus hit.

Also, spending more on products such as new kitchen tiles and cars rather than on services such as restaurant dining and entertainment requires more energy and materials to make products. The problem got even worse.

Rather than a broken supply chain, Sumit said, there is a “depleted supply chain.” “This is a physical crisis, not a psychological one.” This is different from what most people remember.

Mr Sumit once said, “I was frightened by something and stopped spending, but I got more comfortable and the spending came back.” “That’s not what’s happening right now. We need to restore supplies to solve this puzzle.”

The puzzle is complicated by the need to produce energy that is not only readily available and affordable, but does not exacerbate the dire climate change that is already endangering our planet.

It will take years, not months, to reach that goal.

In the short term, capping energy prices may bail out struggling households and businesses, but economists say there is no incentive to reduce energy consumption, a key goal in an energy-scarce world. is blunted by the cap.

Central banks in the West are expected to keep raising interest rates to make borrowing more expensive and keep inflation down. On Thursday, the European Central Bank hiked interest rates by three-quarters of a percentage point, matching its biggest ever hike. The US Federal Reserve is likely to do the same at its meeting this month.of bank of england I have taken a similar position.

The concern is that the vigorous move to lower prices will plunge the economy into recession. Rising interest rates alone will not bring oil and gas prices down. Unless the economy collapses and demand drops significantly. Many analysts are already predicting a recession for Germany, Italy and the rest of the Eurozone by the end of the year. For poor and emerging economies, higher interest rates mean more debt and less spending for the most vulnerable.

“I think we are experiencing the greatest development disaster in history, with more people than ever before rapidly being pushed into dire poverty,” said Goldin, a professor at the University of Oxford. . “This is a particularly dangerous time for the global economy.”

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