Is a new world recession the price for punishing Vladimir Putin?

by Daniel Moss

Standing firm against Vladimir Putin was never going to be free. Energy prices are skyrocketing, companies are pulling out of Russia, and those that stay are at risk of being nationalized. There is concern about the global food supply. The recession talk has begun, even as the world economy is still cleaning up the last one. It would be foolish to rule out a new depression, if it is not upon us yet.

The “R-word” was used a couple of times on Tuesday, with International Monetary Fund Managing Director Kristalina Georgieva acknowledging that risks are growing in several countries, and economists at the Federal Reserve Bank of Dallas warning in a paper that the world economy will probably not be able to avoid a slump, absent a resumption of Russian energy exports this year. Ultimately, that depends on how much pain the United States and its partners are willing to endure to punish the Russian president for his invasion of Ukraine.

At first glance, the world economy has some protection before things turn ugly. The IMF projects an expansion this year of 4.4%, down from last year’s blockbuster of 5.9%, but another universe from the pandemic-induced crater of 2020. Some important caveats: The definition of a global recession from the lender is 2.5% growth or less, not outright contraction, and the fund is almost certain to lower its forecasts next month. While arrival in recession territory is unlikely then, the direction of travel may point in that direction.

Dallas Fed economists Lutz Kilian and Michael Plante wrote that the potential recession could be longer than it was in 1991, the year after the Iraqi invasion of Kuwait. “If the bulk of Russian energy exports are out of the market for the rest of 2022, a global economic downturn seems inevitable,” they wrote. Three decades ago, Saudi Arabia was able to alleviate some dislocations in the market by increasing production. The United States went through a relatively modest recession and was growing by the end of 1991, although recovery did not become apparent quickly enough for then-President George Bush, who lost the 1992 election to Bill Clinton.

Bush then blamed Alan Greenspan, the Fed chairman at the time, for keeping credit too tight. Could current boss Jerome Powell adjust his approach and get a little insurance against a recession? There is little sign of that in the public comments. In any case, quite the opposite. Speaking to the National Association for Business Economics, Powell sounded more aggressive than his relatively hawkish news conference last week after the Fed raised its benchmark rate by a quarter point. He said Tuesday that he is prepared to consider half-point steps at upcoming meetings of the Federal Open Market Committee to rein in inflation. “What would stop us? Nothing: executive summary,” Powell said, pushing down an already battered bond market.

Powell said last week that the labor market is unhealthily strong, leaving little room for ambiguity about the priority now given to curbing inflation. It’s strong: The unemployment rate fell to less than 4% last month and payroll gains were well above estimates. But Powell cannot afford to worry only about the US economy, even though that is the mandate Congress gave the Fed. As custodian of the world’s largest economy and the currency of reserve of the planet, carries a greater load. Many central banks look to the Federal Reserve for direction, if not guidance.

Higher interest rates were coming before Putin began his assault on Ukraine. Monetary authorities began to withdraw accommodation last year and some, such as the Bank of England, raised borrowing costs with the Federal Reserve. But Putin’s name is on most uploads to some degree; most say the attack on Ukraine is, at the very least, exacerbating price pressures. The recession, if it comes, will have its initials somewhere on the page.

The BOE was rightly reprimanded for its communication fiascos in November when it appeared to signal, and then back off, of a hike. More recently, the bench may be reading the hymn sheet a little better. Officials rose this month, but began to soften their language. There may not be a huge amount to come, it was the import. Threats to growth appear to have registered in London.

Powell’s “executive summary” was terribly short and drew laughter from the audience. If you get the perspective wrong, there will be less hilarity.

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