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Anticipating the economic effects of the war in Ukraine is a doomed exercise in futurology, as well as frivolous in the face of the monstrosity and suffering that can be followed in real time. So far, scenarios and market prices suggest that the conflict is likely to reduce growth rates somewhat and increase inflation somewhat. If that’s all it is, it will be bad, of course, but the damage to the global economy will be less than the size of the crack. After all, this is a crisis that profoundly changes global chess going forward.

The desire for coherent and assertive stories, with numbers and probabilities, is irresistible and there is no shortage of gurus willing to fill the gap. Whether we like it or not, however, crises like this only end when they do and never end as expected. And while they don’t end, the damage tends to become less reversible. The technique of building scenarios imagining a return to normality makes less sense when what was normal is likely to no longer be. Any “narrative” must be appreciated at a great discount. Today, we are all experts.

As long as the crisis lasts, the risk of sudden migration to catastrophic scenarios will be on the table. The hope of a quick outcome was dashed early on. The fierce resistance of the Ukrainians and the magnitude of the sanctions took the world by surprise. Currently, neither side appears to have a silver bullet. That Putin has put a price on the rocks to end hostilities raises hopes, but now it’s the Russians who have to match the other side. In the meantime the massacre will continue. That is, there is a reasonable chance of a lasting and dangerous conflict.

Global recession risk

Russia and Ukraine are important commodity producers. In view of this, the obvious and immediate economic impact appears in the form of upward pressure on basic commodity prices, in a context of high volatility. The inflation that derives from these abrupt movements exacerbates a situation that was already very complicated before the war – remember that economists have been underestimating inflation projections for more than a year. Scenarios in which oil exceeds 200 dollars have come to be seriously considered by those who follow the market closely. If this materializes, in addition to inflation, the risk of a new global recession greatly increases.

The work of Central Banks, which was not easy, as economies are operating unbalanced, with idle services and bottlenecks in the production of goods, has become even more complicated. The three most relevant prices in the world, oil, dollar and US interest, are subject to strong and unpredictable changes. For example, who today is able to confidently advise the Fed? How to calibrate monetary policy to minimize the side effects of the damage? The cost of making more or less mistakes, higher than normal due to the pandemic, has increased.

The tendency is always to imagine that the dust will settle after a period of acute stress. In this case, the imbroglio seems so irrational that the spontaneous response is to assume that the parties will soon find a way out, because the alternative is very bad – there is news in this direction. If so, the economic result will be a little more inflation and a little less growth, in addition to the Ukrainian tragedy and Russia’s economic collapse. Maybe, but the real knot is the gigantic asymmetry of the situation: the best is not very good and the worst is frighteningly bad.

For starters, “irrationality” is an important ingredient. Using market exchange rates from the period before the start of hostilities, Russia had an economy the size of Brazil, that is, relevant, but more than ten times smaller than the American or Chinese. It is considered a “superpower” because it has an arsenal capable of destroying the planet several times over. Using these weapons, however, means ensuring one’s own destruction. Rationally, therefore, weapons will not be used, right? Wrong. The moment the possibility of throwing everything on the fan is excluded, Russia evidently ceases to be a “superpower”, being relegated to a lower league – I believe that above the one occupied by Brazil, whose strategic geniuses are committed to transforming the country into a a geopolitical pygmy.

In other words, it is in Russia’s interest to feed the mosquito of insanity that buzzes in the West’s ears. It matters less whether or not Putin has a screw loose. To achieve the goal, it is enough to do the mis-en-scène well and, in that, he is good. When designing a “base scenario”, it is logical to assume the predominance of rationality. However, just giving a small chance to the unimaginable possibilities for the angu to become very indigestible. A respected international consulting firm has guessed that the button can be pressed with a 10% (!) chance. That number doesn’t mean anything. It could be 5%, 12% or 0.5% and it would be the same. The fact is that the threat is real and has to be taken seriously.

This asymmetry tends to make economic scenarios biased towards the optimistic side. Not to mention that, even excluding the possibility of nuclear power, it is very difficult, if not impossible, to estimate the secondary economic impacts of a “shock” that involves the overnight isolation of a G20 country. It is true that the world has an extraordinary capacity for adaptation, but alienating Russia is a different animal from excluding Venezuela or Iran. I believe that there is no base scenario that assumes the definitive segregation of Russia simply because it is impossible to do the math. But the danger is real.

The advantages of irrelevance

Here, the scenario was already bad before and now it tends to get worse, especially with regard to inflation. That said, incredible as it may seem, there are mitigating factors for Brazil and Latin America. Who would have thought that Third Worldism would be of any use, but our continent is so surreal that both “progressives” and “conservatives” have difficulty taking sides in a shuffle that separates democracies (with all their flaws) from authoritarian regimes (with the same flaws). glitches and more). This kind of “realism” can help the region at this delicate moment. These are the advantages of irrelevance.

In addition, we produce many commodities that were suddenly in short supply for the West because of draconian sanctions. In a scenario of stressed prices for a prolonged period, for example, the competitiveness of our oil, which is expensive, tends to increase. It sounds like a joke, but Brazil, which has been crabbing for more than ten years and, collectively, cannot find a minimally reasonable middle ground to get out of the mud, may have become one of the “emerging countries” of fashion. A global Forrest Gump.

It is true that the scenario of four more years of hustling is almost consensual. However, expectations regarding the country are so depressed that the group has been content with little. No major progress is expected from 2023 onwards, but the belief that any electoral outcome will not be followed by a change for the worse in economic policy has gained strong supporters. I keep my beards soaking, but you can’t go against the tide. As a colleague says, rocket has no reverse.

This somewhat benign view fueled by an interest rate that inhibits bets against the real turned our currency into one of the champions of 2022. It is true that the real looked cheap and, depending on the criteria, still is. The fall in the price of the dollar, which may gain strength with the rise in commodity prices, removes some of the pressure on our Central Bank. But that doesn’t change the fact that the scenario remains very challenging, even if things calm down in the world.

Our growth prospects are limited by a mediocre potential of 2%, maybe less. That doesn’t change now and it won’t change anytime soon. Short-term populism, which is no longer exclusive to election years, is eating loose. Faced with these inconsistencies, the Central Bank is left with the task of handling inflation, which is roaring, alone. In other words, with low growth potential and one of the toughest monetary policies on the planet, it is difficult to have dynamism. There is heterogeneity across sectors, as usual. Agriculture and mining, for example, tend to do well, but the “miracle of growth” remains something for the very distant future.

Finally, a wide range of uncertainty means that there are developments with favorable connotations. Russia and Ukraine lose a lot, but suddenly an agreement may come out that brings more stability. The crisis helped unite Europe and the West. Germany decided to spend more, finally. Market forces must push the energy transition, even if it is necessary to take a step back from the beginning – this could be good for Brazil. We can surf again a wave of favorable prices that, unlike the last one, can be well used, who knows. It’s hard to be optimistic in the face of so much brutality, but deep crises can also produce good things.

Celso Toledo is an economist and director of the consultancy LCA

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