Building buffers and using them

By Neelkanth Mishra

There is turmoil in the global economy. First Covid and then a war have curtailed global capacity, forcing prices up as buyers (some boosted by fiscal stimuli) compete for limited resources, until the weakest buyer drops out. While recovery from supply-chain bottlenecks was a procedural challenge, and one hopes the current disruptions in China do not last long, the drop in energy availability globally is difficult to offset quickly. A shortfall in affordable energy is almost certain to hurt global economic output. The current high inventory of goods due to a yearlong logjam in global shipping exacerbates the downward lash of the supply-chain bullwhip, potentially forcing order flows for factories well below what end-demand warrants.

Governments desperate to protect their economies are using fiscal tools to cushion the energy price impact. This will only affect the global distribution of available energy, not pull growth from the future as fiscal interventions normally do. This, together with the substantial reset in the flow of money due to trade (the amount energy buyers pay to energy sellers is higher by several per cent of global GDP) and capital flows (rise in risk aversion among global investors), is also driving volatility in currency markets.

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