Economic growth will certainly slow down, while the question remains whether we will have a recession, that is, negative growth and a decline in output, as a result of higher interest rates by central banks to combat inflation caused by the war in Ukraine and new restrictive measures by China. Michalis Michael, professor of international trade at the University of Cyprus, told KYPE.
Energy and mineral prices were already high, he said, due to the pandemic and the policies of governments and central banks that were taking steps to avoid a recession. In addition, transport costs were higher due to high demand for containers and decreased availability, as many ports experienced delays due to restrictive measures.
The war in Ukraine exacerbated the above situation, since Russia and Ukraine are major producers of energy, oil, natural gas and many minerals, as well as grain. Both the war and the sanctions imposed by the West on Russia have led to significant increases in the prices of energy and many minerals, Dr. Michael added.
On the other hand, the resurgence of the pandemic in China and lockdowns in major cities such as Shanghai led to a reduction in production in China, followed by a decrease in demand for raw materials, which negatively affected the price of raw materials – oil and minerals, said Dr. Michael on KYPE. In addition, he said that while ports in China are still operating, their smooth operation has been affected by restrictive measures as ship service times have increased.He noted that this would lead to a further increase in transport costs.
Therefore, according to Dr. Michael, there are two opposing forces at work: on the one hand, the war in Ukraine and sanctions, which tend to increase the price of energy and some minerals exported by Russia, and on the other hand, quarantine and production cuts in China , which is expected to have a negative impact on commodity and energy prices.
Rising energy prices and transport costs have been passed on to rising consumer goods prices, which, according to the professor, results in high inflation in almost all countries. In an attempt to deal with this, some central banks have begun to respond by raising interest rates to reduce demand, lower prices and inflation, he said.
“It looks like we will have ups and downs in energy prices and the prices of some minerals and grains in the next period, but over time I expect central bank policies to reduce inflation in Europe and America will likely lead to a recession. decrease in demand, decrease in production, and this will lead to a decrease in demand for energy and minerals,” he said.
Therefore, he added, “I expect that in a few months we will have downward pressure on prices for minerals, electricity, energy, etc., which will reduce the rate of inflation, which is the goal of central banks.” But this will definitely affect economic growth.“Economic growth rates will definitely decrease, and the question remains whether we will have a recession, that is, a negative growth rate, a decrease in production. I am very afraid, and this is what most economists expect, that in a number of countries the growth rate is likely to turn negative, that is, production will decline,” he said.
When asked about the trade war between the US and China, which has escalated under Trump, Dr. Michael noted that due to the war in Ukraine, there is not much emphasis on liberalizing trade relations between the two countries. The restrictions imposed under Trump are still in place, creating an additional challenge for the smooth functioning of international trade.
According to him, the war will have a serious impact on the real incomes of predominantly poor countries. Already before the war there was a trend towards higher prices for agricultural products. “Therefore, a bigger problem arises for poor countries, which spend a very large part of their income on food and energy. The consequences for them will be much greater,” he said.
Concerning Cyprus, Dr. Michael said that we also suffered because of the rise in prices, but it was mainly production that suffered, especially services. He noted that about 30% of tourists came from Russia and Ukraine, whose arrival this year is not expected, which reduces the volume of services provided and reduces the rate of economic growth. In addition, if the EU decides on further sanctions against Russia, he said, shipping, which contributes about 5% to Cyprus’ GDP, is likely to suffer, with additional negative consequences for the Cypriot economy.