From COVID-19 to the Ukrainian conflict: dealing with serial crises
Ernest Gnan, Christoph Schneider, Claudia Stowasser
2021 was characterised by the continuation of ups and downs in economic activity induced by successive waves of the Corona pandemic. Initial optimism regarding an end of the pandemic during the first half of 2021, when vaccinations became available and were rolled out, was dampened by limitations in achieving herd immunity due to persistent skepticism against vaccination in non-negligible parts of the Austrian population, requiring new severe containment measures from the Fall in response to soaring infections and hospitalisations. Against the background of global supply constraints, which turned out as more persistent than expected, the overall economic recovery trend was accompanied by mounting inflationary pressures. From March 2022 onwards, the Russian invasion in Ukraine and Western countries’ economic and financial sanctions in response, led to sky-rocketing energy and raw material prices, further boosting inflation to levels last seen in the 1970s/1980s. A Covid-19 wave in China added to, and prolonged, already severe disruptions in global value chains in Spring 2022. The heightened uncertainty slashed economic confidence and triggered sharp downward revisions to the outlook for economic growth, prompting some observers to express fears of stagflation like in the 1980s.
Central banks worldwide responded gradually by reducing their stimulus and by normalising their monetary policy stance. Reflecting a stronger and earlier cycle in the US, the Fed moved ahead of central banks in Europe. Fiscal policies continued to accommodate economic losses caused by pandemic lockdowns throughout 2021 and early-2022. From the Spring of 2022, their focus shifted to measures to cushion the impact of high inflation and to increase military spending in response to the threat from Russia. At the EU level, in a medium-term perspective, the newly created NGEU slowly gained speed and contributed to financing the needed spending without generating concerns of fiscal sustainability in vulnerable EU countries. read more