Cost-of-living crisis on focus as G20 leaders seek to ward off global recession

The world is facing a cost-of-living crisis
The current cost-of-living crisis warrants coordinated international action led by G20 nations to ensure high economic growth and productivity.

The Russia-Ukraine war has triggered a cost-of-living crisis for millions of people across the world, darkening the global economic outlook significantly, says Kristalina Georgieva, Managing Director of The International Monetary Fund. The world is facing increased risk of recession in the coming 12 months, she wrote in a blog post.

Inflation pushed up the prices of food and other essential items across the world, creating problems for the poorest sections of world population. In the US, the benchmark inflation rate rose to a 40-year high of 9.1% in June. In India, retail inflation slowed marginally to 7.01% in June from 7.04% in May, but remains higher than the RBI’s comfort range of 4+/-2 per cent.

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Central banks into rate-hiking spree

In June the RBI raised policy rates by 50 basis points to address inflationary expectations after effecting a 40 bps increase in May. Monetary policy experts expect a further hike of 35-40 bps in next month’s monetary policy committee meeting. Markets world over have been trembling over the possibility of a historic 1% hike in US interest rates.

A rate hike by Fed will trigger similar actions by other central banks. The Bank of Canada has already raised its benchmark rate by a percentage point. The week also saw the Reserve Bank of New Zealand, the Bank of Korea and the Monetary Authority of Singapore raising interest rates.

IMF’s Georgieva says the global economic outlook remains extremely uncertain ahead of the meeting of G20 finance leaders and central bank governors at Bali. The IMF is likely to cut the growth forecast for the global economy to 3.6% for this year and the next, but Georgieva warned against potential downside risks. The G20 meeting which began on Friday was dominated by discussions on soaring inflation and global food shortages.

The sufferings of people in war-ravaged Ukraine are just one side of the human sufferings due to the prolonged conflict. The bigger impact felt on the global economy is by way of a cost-of-living crisis that pushed millions of people into abject poverty. The economic impact of the war felt through rising commodity prices made several essential items unaffordable to millions of poor families.

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Georgieva says the current situation warrants decisive action and cooperation under G20 leadership. She cites the recent IMF report to the G20 that lists policies that can help nations tide over the crisis. She lists three priorities for governments that countries can use to navigate this sea of troubles:

All-out effort to tackle cost-of-living crisis

The current bout of persistently high inflation can affect the global recovery and lead to a cost-of-living crisis that affects the vulnerable sections of world population. Inflation is ruling at multi-decade highs in many countries, and continues to rise unabated. This has led to monetary tightening by central banks which hiked policy rates several times this year between 1.7-3 percentage points. They need to effect sharper rate hikes and clearly communicate about policy actions.

The runaway inflation and monetary tightening by the Federal Reserve saw the US dollar appreciating, leading to large portfolio outflows from emerging markets. This has further led to weakening of currencies and depletion of forex reserves in several countries. So, the global action against inflation should be concerted that all economies should come out of the crisis unscathed.

Fiscal policy must complement monetary policy

The governments must tighten their purse strings and stay away from borrowing heavily while interest rates stay elevated. This is of prime importance in countries that face debt crises. All economies must roll back the extraordinary fiscal support measures taken to boost demand during the lockdown days.

The fiscal packages must be targeted to support the most vulnerable households suffering from high food and energy prices. The governments should resort to cash transfers that have been found more effective than distortionary subsidies and price controls.

Needed: Closer global cooperation

The world is witnessing a crisis unmatched in magnitude since the Great Depression. This warrants coordinated international action led by G20 to ensure higher economic growth and productivity. Close coordination under G20 during the pandemic crisis and the recent gains at WTO highlight the benefits of close coordination and concerted action.

Coordinated efforts are needed to tackle the cost-of-living crisis that could push 71 million more people into abject poverty. It could allay fears over food and energy supplies. Towards this, the richest nations should offer urgent support for the countries struggling under inflation. The most urgent need is to reverse the recently imposed restrictions on food exports.