G7 leaders warn that gas prices, food shocks, war and inflation are increasing economic risks

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Bonn, Germany – Financial leaders in the world’s most powerful nations warned this week of the potential for a global economic slowdown, as threats from Russia’s invasion of Ukraine continued to grow.

Globally, the war has caused energy and food prices to rise. In the United States, Britain and Europe, central banks bent on curbing inflation are raising interest rates, which threatens to push countries into doing so. Recession. The developing world is facing an emerging debt crisis in addition to the growing problem of hunger raised by war.

In the United States, as in most parts of the world, Gasoline prices rose Stock markets fell, with the S&P 500 index Approaching a bear market, to close the week 18 percent lower than its high in early January after a rally late Friday. Major retailers including Target and Walmart reported worse-than-expected earnings and profits this week, blaming higher costs and excess inventory that has built up in response to supply chain problems.

“If I had to sum it up: more uncertainty, more inflation, less growth,” Francois Villeroy de Gallo, governor of the Bank of France, said of the impact of the war, at a conference here of finance ministers and central bank governors. of the Group of Seven powerful industrialized countries.

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After the approval of trillions of dollars in fiscal stimulus to avoid deflation caused by Corona Virus As a pandemic, global economic leaders are now grappling with the threat of “stagflation” – slow or negative economic growth, along with rising inflation.

Economists say the risks abroad may be greater than in the United States. In Europe, the Eurozone grew by only 0.2 percent in the first quarter of 2022, indicating a possible slowdown. Some economies within Europe even contracted: Italy, for example, contracted slightly in the first quarter of this year.

Jason Furman, a former economist in the Obama administration, said the war poses a more serious economic threat to Europe than the United States, especially given the continent’s dependence on Russian energy. China’s efforts to contain the coronavirus also continue to rattle the global economy, with the latest data from Beijing showing a sharp drop in retail spending and a dip in gasoline production.

Russia’s economic situation has been getting worse since the war began, although the White House says it expects Russia’s gross domestic product to shrink by as much as 15 percent this year due to sanctions imposed after the invasion, despite Moscow’s profits from higher energy prices.

The World Bank also warned of a “huge debt buildup”, particularly in the poorest countries, where debt payments are at their highest level in 20 years. Half of low-income countries are now classified as “at high risk” of debt distress, according to the Center for Global Development, a Washington-based think tank. A default by poor countries could have ripple effects across global financial markets if creditors around the world do not pay their wages.

“This is a very difficult economic situation,” Treasury Secretary Janet L. Yellen said after the conference on Wednesday evening. Yellen said economic shocks from the war, additional sanctions on Russia and more inflationary pressures are all possible. But she, like many European officials, still holds some hope that policymakers will be able to handle the difficult circumstances.

The global economy, particularly the United States, was expected to grow relatively quickly in 2022 before the war, creating a buffer that might help avert a recession. “I think a soft landing is conceivable,” Yellen said, referring to the Fed’s ability to cool inflation without causing a recession.

Soaring energy prices hit Europe amid war fears

The G7 conference resulted in limited action to stave off these emerging threats to the global economy. In closed-door discussions Thursday and Friday, world leaders decided to take largely unspecified actions on debt management in developing countries, global economic stability, and taming inflation. The most concrete measure was the pledge of nearly $20 billion in economic aid to Ukraine.

In a joint statement, the G7 leaders also decided to take measures related to Sri Lanka’s debt crisis and alleviate food shortages. They also pledged to keep international markets open, as some countries move to impose export controls to prevent scarce supplies of food and other goods from leaving their countries. Global economic leaders in Bonn emphasized their understanding of the extent of the risks, but also acknowledged that they may not be ready to resolve them.

A senior official of the French delegation, who spoke on condition of anonymity to describe the private meetings, said that “implementation is very slow” and that world leaders must move faster to solve the debt challenges of developing countries.

“The situation of low-income countries poses risks to global security and the stability of the international financial system,” German Finance Minister Christian Lindner told reporters. “We will have to deal with the situation.”

Linder later added: “This is a risk to international financial stability, and it gets worse if these countries run into financial difficulties. [surrounding] food security in their countries.

This hunger crisis is already painful, and it could only get worse as the war drags on. More than 14 million people in Somalia, Ethiopia and Kenya – half of them children – be “On the verge of starvation,” according to the International Rescue Committee. This number is expected to rise to 20 million by mid-2022 without major global action.

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During the G-7 meetings, US and French officials were more vocal about the need to address the hunger crisis, according to three people familiar with the meeting, who spoke on the condition of anonymity to describe closed-door discussions.

“It’s much worse than it was even at the start of the coronavirus recession, although they’re not talking like they are,” said Max Lawson, head of inequality policy at Oxfam International, a humanitarian aid group. “The impact we are already seeing in the developing world is horrific and painful, and it is happening now.”

Urgent challenges have pushed some of the aspirations of other Western leaders into the background. For example, Yellen prioritized rearranging the international tax system to ensure that large corporations pay a minimum global tax rate. With this reform stalled amid objections from Poland, it did not dominate discussions at the G7. Likewise, tough action on climate change – which the G7 nations have long sought – also drew attention at this conference. It is expected that many of these issues will be discussed further when the G7 leaders meet later this year.

National financial leaders are increasingly concerned about global economic conditions, Eswar Prasad, an economics professor at Cornell University who has worked at the Federal Reserve, said, citing talks he had with international finance ministers and central bank officials. Of particular concern is that the main tool for policy makers to address economic shocks – the additional stimulus to increase demand – is largely off the table due to high inflation and high levels of debt.

“The global economy is at a critical juncture, and is experiencing a variety of adverse shocks,” Prasad said. “The degree of concern has risen significantly due to increased confidence in declining growth, adverse supply shocks, and rising inflation – all of which greatly reduce the scope for policy maneuvering.”

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