World economy: has the Time of Troubles come?

Assuming the worst is necessarily likely is not enough. We simply have to admit that it is difficult to see clearly in a context marked primarily by many unknowns.

By invading Ukraine on February 24, V. Putin, among so many devastating consequences, contributed to the return of troubled times for the world economy. Although the figures published so far show good overall activity in various regions of the world in 2022, the master of the Kremlin is questioning the future of economic development, preferring the return to the forefront of macroeconomics as the main factor determining the behavior of financial resources.

Their erratic movement over the past four weeks is a reflection of the difficulty for operators to get a sense of the evolution of the short-term situation on the one hand, but also of the contours of the world economic order that will inevitably emerge in the medium term from others. Rarely in forty years has economic visibility been so hazy!

In such conditions it is difficult not to be frightened, especially when the price of a barrel suddenly soars to $135 per barrel, as it did just two weeks ago. Moreover, last week’s return of prices below the $100 mark demonstrates the difficulty of economic forecasts in such a chaotic context.

The risk of a recession must necessarily be revised upwards.

Admittedly, the risk of stagflation has increased over the last month. Likewise, a recession must necessarily be revised upwards. It can even be assumed that in the midst of the market downturn in recent weeks, operators have begun to make a recession a very likely scenario, especially in Europe.

The shock of the Ukrainian invasion is certainly deep, and its reality unfortunately undeniable, which should prompt caution in economic forecasts; on the other hand, it is also necessary to know how to recognize that absolute pessimism is a dangerous option for many moving variables that need to be integrated into the equation. The example of the erratic movement of oil prices mentioned above, which, moreover, can be extended to the entire energy sector, is not unique. Is it possible to rule out a diplomatic solution to the crisis in a relatively short time frame? The answer is far from simple, which does not mean that it is necessarily positive. Can V. Putin still escalate the conflict, brandishing a nuclear threat at the beginning of his aggression, or are we “simply” moving towards a localized, protracted and acute conflict?

Will Europe, which has shown an “amazing” alliance in crisis management, allocate funds for its strategy of energy independence and its desire for a common defense? This will not be without fiscal implications and could reinforce general bond issuances launched in the wake of the COVID-19 crisis. In general, European fiscal activity is strengthening, and this can be an important support to prevent the worst economic scenarios in the short term, as part of the purchasing power protection policy that is becoming more evident every day. Can monetary policy ignore geopolitical developments and continue on the path that began just over a month ago? Recent decisions by the Federal Reserve and statements by members of the Council of the ECB seem to point to this. Is the path traveled in this way unchanged? Nothing is certain, especially if commodity prices stabilize at high levels but do not reach the highs seen immediately after Russian troops entered Ukraine.

A world of disparate blocs, much less globalized in terms of human, economic and financial flows, is not an absurd hypothesis.

We could go on stating the unknowns that currently mark the route of the global economic cycle. This will only reinforce the sense of confusion – in terms of unclear and ambiguous elements – that undermines everyone’s judgment in determining the economic and financial scenario.
And again, not counting the issues related to the new world order, which will inevitably arise after the end of this war. A world of disparate blocs, much less globalized in terms of human, economic and financial flows, is not an absurd hypothesis. Will such an environment be more inflationary than what we have known for 40 years? Presumably. Will he be marked by a smaller stature? Not necessarily, but the spread of the latter could be irreversibly affected, if only because of the stated desire to reinforce the “regionalization” movement of production chains, which the covid-19 crisis has already brought back to the fore.

The Time of Troubles and its false tsars is one of the darkest pages in Russian history, with its share of human dramas. Currently, the world economy is facing problems of a different nature: we are faced with a clear lack of transparency, which makes it difficult to determine the economic outlook for both the short and medium term.

Of course, much is beaten up compared to what could be considered likely at the beginning of the year. On the other hand, the assumption that the worst is necessarily probable makes no more sense than admitting the difficulty of seeing things clearly in a context primarily marked by many unknowns.

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