Russia’s invasion of Ukraine has dealt a blow to the global economy—weakening the post pandemic recovery and aggravating already-high inflation. Even if the worst fears of rising geopolitical tensions and larger economic disruptions do not materialize, private forecasters anticipate an inflationary slump for the world economy.
In this context, the U.S. economy faces significant headwinds from higher food, energy and raw material prices.
Private forecasters do not anticipate a fiscal/monetary policy mix robust enough to quell surging prices through 2023, raising concerns that above-target inflation could become entrenched. The war’s economic damage will partly depend on the persistence of high inflation and economic “scarring” over the medium to long term.
Sourced: PeoplesDispatch.com
Headwinds for the U.S. Economy
The short-term economic impacts of the war are likely limited for the U.S. since its trade ties with Ukraine and Russia are modest, although the commodity prices surge is pressuring inflation higher.
Unlike most other countries, the U.S. can increase domestic energy production and, to some extent, also agricultural output to partly offset shortfalls and restrain price hikes. However, the ability of U.S. producers to boost production quickly and significantly is not unrestrained due to supply-chain bottlenecks, shortages and various regulatory, financial and technological hurdles to profitability.
U.S. inflation was already at historically high levels after a period of fiscal expansion and monetary accommodation following the COVID-19 economic shock. The onset of the war has exacerbated the problem globally, prompting the Federal Reserve to begin tightening. Given the potential for escalation of the Ukraine conflict, the balance of risks on U.S. inflation over the short to medium term appears tilted to the upside. This might require a more front-loaded and rapid reaction to reduce the likelihood of inflation climbing further and to prevent those tail risks from materializing.
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This high inflation risk coincides with increasing signs of buoyant asset markets, notably housing. In parts of the U.S. particularly dependent on the oil and natural gas industry, booming energy prices can add pressure to already-elevated housing prices.
Sourced: New York Post
Housing market exuberance complicates monetary policy, as higher rates can trigger a downward asset price correction and a negative wealth effect—since housing is often the largest part of household wealth. In the extreme, a correction prompts financial stability concerns as well. High indebtedness—a global trend—poses its own risks and can curtail the fiscal space needed should another crisis unfold.
In the longer term, the economic scars for the U.S. and globally will depend on the war. The conflict may alter the global economic and geopolitical order, leading to a new era of deglobalization as trade, energy and supply chains reconfigure or decouple, payment and financial networks fragment, reserve currency holdings shift, capital flight problems emerge and defense alliances reshuffle. The extent of the impact will also depend on how long elevated price pressures last and on how policymakers respond to anchor long-run inflation expectations, so as this year our economy has gotten scared from stock market tumbling and our market crashing, what about the numbing crypto market.....to be continued!
By Sunny Wadhwani
October 16th, 2022
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