Orchestrated by Sabrine Ajroudi, Department of Research andInternational relations.
Reviewed by Dr. Badra Gaaloul, President of the International Centre for Strategic Security and Military Studies.
Translated By: Wissal Khlifi
The world is currently going through a severe economic crisis. Prices have witnessed a significant and unprecedented rise, notably in both, food and power vital sectors. Many economic analysts have indicated that imbalances in supply chains and high freight costs are the two main factors causing the global crisis. The inflation index in the United States of America has increased significantly at a rate that is the first of its kind in a long time. Accordingly the major leading global economies are closely following and anticipating the possible major economic developments up ahead.
How does the American economic crisis unfold?
The United States’ economic shrink is reflected in the high inflation rates. According to the United States Department of Commerce, power, vital and other secondary sectors’ tariffs had witnessed unprecedented drastic escalations that are the highest since 1991, which is nearly 30 years to come.
This has led to a 4.4% increase in the price of personal consumption expenditures; which included all items, both power and food; being the highest since 1991.
These numbers; with the exception of power and food; came in line with the forecast of the Dow Jones Industrial Index (Le Dow Jones Industrial Average), which confirmed the jump in the inflation rate by 3.6% this year.
The economic paradoxes of the depth of the economic crisis in the United States of America are that despite the significant increase in the value of prices, personal income decreased by 1%, in contradiction to the expectations of Dow Jones, which expected that it was most likely to decline by 0.6%, while consumer spendings rose by 0.6%.
These statistics indicate the depth of the American economic crisis during both; last October and September.
How did this crisis start?
It began after the disruption of the supply process due to the spread of the corona virus rendering various major industrial centers and many countries unable to maintain the same productive pattern. Another major factor being the global lockdown that resulted in a downgrading demand for goods and oil which hit its lowest ever on May 2020.
The demand for goods and energy has returned at a pressuring pace with the spread of vaccination and many countries resumed working on the supply chains processes. In countries severely affected by the extended lockdown and with low production and demand waiting to move beyond the old pattern of economic activity. With the discovery of vaccinations and their wide spread, the challenge of suffocation of supply chains due to increased demand has emerged.
In this context, economic analyst Tim Wee said, “As the global economic recovery gains momentum, what is increasingly evident is that it will be hampered by supply chain disruptions that are now popping up around every corner.”
“Border controls and mobility restrictions, the lack of a global vaccine permit and the pent-up demand of having to stay at home have all combined to perform a full-blown storm that will disrupt global production since deliveries are not timely. Thus, costs and prices will rise, and GDP growth worldwide will not be strong as a result.” He added.
Lastly, he pointed out that the display of goods played a major role in deepening the economic crisis, given the deficit in supply chains such as labour, containers, freight, ports, trucks and railways…
With the increasing demand for goods facing production problems with the imbalance in the supply chains, freight prices rose, especially for goods coming from China towards the United States of America and Europe. Adding to that, the truck drivers sector in the two countries is witnessing a severe shortage, leading to other problems in the arrival of goods.
As a result of the global pandemic, it became clear that there are many deficiencies in supply networks. Once a defect appears in one supply chain, the rest is greatly affected, and this is shown by the high correlation between supply chains, thereby affecting economic growth and rising inflation.
This economic crisis is not limited to the United States of America. In October 2021, Europe recorded the highest inflation rate in 13 years, i.e., since 2008, at 4.1%, according to the European Statistics Office, while economic analysts predicted 3.7%. This high rate of inflation in Europe comes as a result of the energy crisis. Energy prices rose in a way that made them represent 23% of inflation, besides, natural gas prices rose by 500%, meaning their prices doubled 5 times. In addition to non-essential goods (their value remains stable for the longest time) that is between 15 and 30% higher.
Observers indicate that the pertinacity of this inflation crisis may cause global inflationary stagnation.)))))
Repercussions of the economic crisis
The Federal Bank’s Reserving policy raises many warnings and expectations that, in its plan, conditions have not been rectified. The alarming rate of inflation will affect the entire world, as financial distress will include many countries and many big industrial markets.
In regard to emerging and new markets, they would not be able to survive in the face of this great global wave of challenges, with the expectations that the world will actually hit the core of crisis by the beginning of 2023.
According to the Federal Reserve Bank, the global pandemic has imposed such hikes in the crisis rates, such augmentations were absolutely necessary to control the status quo. It believes that this hike is temporary and not permanent and that it will gradually diminish, stressing that it will not continue. Central banks are expecting various urgent changes in their interest rate to reduce inflation by reducing liquidity.
Central banks in developing countries are trying hard to ensure the balance of an economy so far shaken by the pandemic and price inflations.
With regard to the implications of some markets’ policies for their future investor transactions, emerging markets are well-off with investors since their monetary policy has relied on inflation reduction, which may attract foreign investors who are monitoring the situation and future risks to their enterprises in light of the major economic crisis.
In a report, Bromberg claimed that “investors would prefer those countries where central banks preempt inflation,” and pointed out the need for central banks’ initiative to reduce inflation so that the 2020 economic scenario that contributed to the decline in GDP would not be restored.
Central banks are closely monitoring the economic developments tensed up about the high interest rates they will pay out of the economic crisis, looking for ways to get out of this distress that threatens the world economy in the most effective way.
Some markets are still dealing with problems in production processes, which will lead to a further rise in international prices and thus a higher inflation index.
The End of the Economic Crisis
Bloomberg believes that there are no indications that this economic crisis will soon end in the short or even long term, especially since problems in supply chains continue to persist, plus the constant rise in prices of raw materials, not to mention the surge in high demand after the Covid pandemic lockdown and the Federale continues its monetary policy.
In light of the lack of guarantees of non-loss or profit and with all of the previous factors, investments will surely scarce. Economic specialists expect that the current economic crisis is creating what is called inflationary recession, in which case economic growth is weak and unemployment rates are high, on the other hand, the prices of various commodities, both basic and non-essential continue to stack up.
Central banks are face to a big state of deficit as diminishing inflation will bring further pressure to the economy, so policies are being sought to reduce this alarming indicator with the lowest cost. This is challenging, especially since the index of increasing demand is tricky to monitor and has a significant impact on rising prices, thus inflation growth. The federal reserve initially targeted an inflation rate of 2%, but the situation is currently out of control as the indicator is close to 5%, and observers expect the indicator to increase in the next year.