Inflation Threatens the Global Economy After Major Support and Stimulus Plans

The global economy witnessed the fastest rise in inflation since 2008, with trillions of dollars spent in the form of stimulus packages from governments and central banks, in the face of the repercussions of the Corona pandemic.

This came at a time when the economic recovery is accelerating, with the expansion of vaccinations against the virus, which allowed easing restrictions on economic activities, especially in major economies such as the United States, China and Europe.

The annual inflation rate for the countries of the Organization for Economic Cooperation and Development, which includes 38 countries that represent about 60% of the global economy, jumped to 3.3% last April, from 2.4% in March, to reach the highest level since 2008.

The United States of America came at the forefront of the countries with the highest inflation rates, at 4.2% in April.

These inflation rates come after financial packages and incentives injected by major governments to support companies and infrastructure with the aim of promoting economic recovery; This led to an increase in consumption and global demand for goods, especially energy demand.

For example, the United States aims to provide fiscal stimulus packages to revive the American economy amounting to $4 trillion, according to US President Joe Biden.

On Wednesday, the European Union began activating an economic recovery plan amounting to 750 billion euros (915 billion dollars) funded by a joint loan, which was approved by the Parliament of the Union late last year.

Return of consumption

The Lebanese economist, Jassem Ajaka, believes that the world’s economies are under the grip of the Corona pandemic for a period of up to a year and a half. This led to a halt in economic activity and a sharp drop in consumption, and thus a decline in global demand.

Agaka added that the decline in global demand for goods in general led to a decline in inflation rates, and therefore when vaccines appeared and solutions to the pandemic problem were found to some extent, consumption returned to the upside, and inflation rates rose with it again.

The Lebanese expert pointed to the strong link between consumption and inflation on the one hand, and growth rates on the other hand. Each is a cause and effect of the other at the same time.

The World Bank expected the global economy to grow by 5.6% during 2021, while the International Monetary Fund expected the global economy to achieve a growth of about 6%. 

The normal rates of inflation for developed countries come at 2%, while in developing countries they reach 4%.

Tough bets

However, decision-makers’ bets on economic stimulus, by offering huge financial packages, remain a matter of controversy, as this theory depends on the exploitation of one economic factor while holding the rest of the factors constant.

According to an article by American economics professor Nouriel Roubini, recently published by the British newspaper “The Guardian”, the fiscal stimulus will not lead to high inflation; Because families will save a large part of it to pay off the debts that they have accumulated during the epidemic period, which reduces demand.

According to Roubini, investments in infrastructure will not only increase demand; It will also increase supply. 

Roubini predicted that, in the short term, stagnation in the labor and commodity markets and in some real estate markets would prevent a sustainable inflationary boom; But in the longer term, Roubini said loose monetary and fiscal policies would start to create persistent inflationary pressures.

Last week, the Food and Agriculture Organization of the United Nations (FAO) expected the costs of global food imports to rise by 12% in 2021 to a record level, due to the high cost of basic commodities and increased demand.

The organization said, in a report, that the bill for food imports around the world, including shipping costs, is expected to reach $1.715 trillion this year, from $1.530 trillion in 2020.

The costs of merchandise imports in general, as of the last quarter of 2020, increased due to confusion in supply chains, whether from raw materials markets or industrial countries towards consumer markets.

The monthly food price index recorded its highest level in 10 years last May, reflecting sharp gains for cereals, vegetable oils and sugar, according to the report.

While inflation growth was a global goal during 2020, due to the decline in global demand for consumption in conjunction with the repercussions of the Corona pandemic, today it has turned into an international concern due to the fiscal stimulus packages, which led to a significant jump in consumption.