Talal Abu-Ghazaleh

The world economy has been hit with a multiple whammy over the past few years with the fallout of the pandemic, strangled supply chains, the war in Ukraine, soaring energy prices and rising inflation bringing instability to global markets. This is a period of elevated risk as modern economies take a pounding with the chances of a global recession rising, exacerbated by aggressive hiking of interest rates in a bid to stem inflationary pressure and restore price stability.

The Federal Reserve has pledged to keep tightening the purse strings and continue with steep interest rate hikes as well as proceeding with quantitative tightening programs. The main instrument to control inflation is to increase interest rates in an attempt to stymie expenditure. Interest rates that we are seeing today are reminiscent of the 1980’s with the UK and Europe suffering heavily with double-digit inflation rates, the highest in forty years. The rapid increases in borrowing spells trouble for lenders and housing markets which is never a good thing, having knock on effects further down the line.

The President of the European Central Bank Christine Lagarde has warned of supply shocks as Europe contends with huge rises in energy, with the Governor of the Bank of England Andrew Bailey saying it is walking a tightrope between inflation and recession. Soaring energy prices, Russia’s war and increases in prices of food and manufactured goods are squeezing consumer purchasing power which is affecting us all. Clearly the longer this lasts the higher the economic costs will be and the effect of an appreciating dollar as the Fed’s policies take hold will have reverberations in other economies as the cost of the dollar becomes more expensive in local currencies.

Across the water in China, things are not looking much better. The Chinese are trying to fend off a property market crash characterized by falling apartment sales and numerous debt defaults by mega property developers which could result in the world’s biggest ever property crash. What seems to be the worst cost of living crisis in the West will have a knock on effect on China in terms of demand for its finished goods. China also faces difficult relations with the USA as Uncle Sam tries to isolate it from all sides from the processor manufacturing sector. It also suffers from an increasing aging population, has poor relations with many western states and faces mounting encroachment from the state as President Xi JinPing puts ideology over economy.

It seems that we are all in for a difficult ride in the coming months with the rise in anxiety across global markets as clear as day. This is just the beginning and I fear the worst may be yet to come.

I am often asked what specific actions should be taken by countries to combat such difficulties. My answer is that it is very difficult to paint viable solutions in broad strokes and I would say that each country should look carefully at its own economic situation and assess its own risks that inevitably vary from country to country. Every country's situation is different and I would urge specialist government committees to be formed to make a comprehensive and holistic analysis with solutions that are applicable and pragmatic.

However, and from my experience, I would suggest that such committees should consider the following:

·       Creating attractive foreign investment climates.

·       Transforming into a digital state making government more efficient and transparent.

·       Empower citizens with digital skills to make them more employable.

·       Adopt policies to stimulate GDP growth to create more job opportunities. Invest in more sustainable forms of energy as well as promote local production of essential food items.

·       Modernize education systems and promote wealth creation and innovation through information technology.

I see that we can only future-proof ourselves if we look at a combination of factors rather than solely relying on economists to help us get out of such a quagmire. We should be promoting active debate among all sectors of society to help our leaders and lawmakers make better and more informed decisions.