The EDB Macroeconomic Review: the global economy will have to adjust to persistently elevated inflation
Almaty, 10 April 2023. The Eurasian Development Bank (EDB) presented the latest issue of the Macroeconomic Review for its six member states – a regular publication, which provides a snapshot of the macroeconomic situation and projects short-term developments in the member countries. The review also contains detailed statistics on key macroeconomic indicators.
In March, global business activity maintained a positive trend. Combined US and eurozone PMIs were the highest since the middle of the previous year. China and India both experienced strong growth. The review contends, however, that growth observed in the world’s largest economies means a recovery to a significant extent, which is further overheating the labour market and contributing to consumer price increases, making it harder for developed countries’ central banks to combat inflation.
Monetary regulators in most countries raised key rates in March, accompanying their actions with hawkish rhetoric. However, US inflation remains well outside the target, while core inflation in the eurozone continues to rise.
The review also notes that efforts to constrain inflation have significantly increased the cost of borrowing for all sectors. The first effects have been seen in the financial sectors of the US and Europe, where pressures continue to mount against the rising cost of credit. However, the publication stresses that the risks to the global financial sector are not yet critical.
EDB analysts believe that the negative impact of rising interest rates cannot be limited to the financial sector. The effect is already spreading to other sectors as evidenced by a drop in IT employment as well as in demand for housing in the US, which poses risks for the construction industry.
In this context, analysts do not yet see much sustainability in the positive dynamics of the world’s economic activity. The earlier mentioned recession risks for the US and EU economies are high and will push developed world’s governments to ease their monetary policies.
All these factors, according to EDB analysts, will hinder the return to low inflation rates (1–2%) that have become customary in developed economies. The US and EU countries will probably have to adjust to higher inflation (3–5%) and, consequently, higher interest rates.
High global inflation will directly affect the development of EDB economies. First and foremost, this would worsen the policy environment to contain consumer price increases, given the high share of imported inflation in most countries in the region. The Macroeconomic Review, therefore, underlines the assumption that inflation will accelerate in some countries in the region by the end of this year.
At the same time, EDB analysts note that the realisation of global recession risks will reduce the world’s demand for the region’s exports. This will constrain growth in the region’s economies, especially those that are commodity exporters.
The Macroeconomic Review is available on the Bank’s website.
Additional Information:
The Eurasian Development Bank (EDB) is an international financial institution investing in Eurasia. For more than 17 years, the Bank has worked to strengthen and expand economic ties and foster comprehensive development in its member countries. The EDB's charter capital totals US $7 billion. Its portfolio consists principally of projects with an integration effect in transport infrastructure, digital systems, green energy, agriculture, manufacturing, and mechanical engineering. The Bank’s operations are guided by the UN Sustainable Development Goals and ESG principles.
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