This was supposed to be the year the world economy recovered from the shock of Covid-19. By the end of 2022, official forecasters expected the US, European and Chinese economies almost to have returned to the paths they were cruising along before the pandemic. Other emerging economies were lagging behind, but they also expected to be growing at rapid rates and slowly getting back to normal.
Inflation was a problem, for sure, the IMF said in its October assessment, but it said that rapid price growth “should gradually decrease as supply-demand imbalances wane in 2022 and monetary policy in major economies respond”.
The fund was not naive. It noted geopolitical and pandemic risks in its assessment, but hoped they would be dodged. Three months into 2022, those warnings have become reality and the global economy is now facing the risk of a sharp deterioration.
Russia’s invasion of Ukraine is imposing a severe stagflationary shock, raising prices as energy supply is threatened and squeezing household and corporate incomes as essential commodities become more expensive.