Three threats line up and risk throwing the economy

Three threats line up and risk throwing the economy

Just a year ago, economists on the planet were celebrating a rapid recovery from the recession in which the COVID-19 pandemic had pushed the world’s economies. This time they fear that we will have to endure a more severe and long-lasting recession.

In the United States, the central bank, the Federal Reserve (Fed), is preparing to fight high inflation by sharply raising the reference interest rate and seeking to cut public spending. In Europe, rising energy prices are hitting Europeans’ purchasing power and raising costs in industry. And China has just imposed the strictest lockdown since the beginning of the pandemic, amid a strong wave of SARS-VOC-2 virus Omicron disease.

All together they catalyze a bleak combination for the global economy, and the outlook is even darker, say the British from The Economist. Many economies will have to go through a recession, albeit at different times, depending on the obstacles they face.

Across the Atlantic

The US economy is overheating. The annual rate of price inflation is 7.9%, and the hourly wage is 5.6% higher than a year ago. The number of jobs is twice as high as the number of unemployed – a record in the last 70 years.

“In the last 75 years, every time inflation has exceeded 4% and the unemployment rate has fallen below 5%, the US economy has entered a recession within two years,” said the Fed’s former president in 1999. -2001, Lawrence Summers, in a text published by The Washington Post. Now (data are from March), the inflation rate is approaching 8%, and the unemployment rate is only 3.6%. Therefore, there is an 80% chance that the US will enter a recession in 2023, he continues.

By 2021, the Fed has hoped that Americans who have left the labor market due to the pandemic will return. In the last six months, their prayers have been heard – more than half of those targeted have returned to work. Wages continued to rise (perhaps because they negotiated firmly against the background of eroding living standards).

And the Fed aims to cool the economy and reach the two percent inflation target. For these reasons, the Fed is expected to raise the short-term interest rate – from below 0.25% at the beginning of the year to over 2.5% by December, and the outlook is expected to jump to 3% by 2023.

In mid-April, the Fed drew up a $ 8.5 trillion bond reduction rate in May at a faster rate than during the last quantitative easing (QT) period.

Although necessary, the monetary brake is jeopardizing economic growth. History suggests that it is often difficult for the Fed to cool the labor market without pushing the economy into recession. They have managed a smoother landing only three times since 1945. And never at the same time as the effort to lower inflation, so it would be a premiere. Securities investors are betting that in two years the Fed will have to cut interest rates again, amid the economic downturn. Therefore, in the next two years, the recession is very likely.

In March, investor Carl Icahn, founder and chairman of Icahn Enterprises, the owner of more than $ 15 billion in wealth, said in an interview that the Fed is not ready to make a “smooth landing.” Icahn believes the US economy cannot avoid a recession by the end of 2023, in line with Deutsche Bank economists’ estimates. “We anticipate that a tightening of monetary policy will only deepen the recession,” said Fortune.

Europe and inflation

Europe also has a problem with inflation, but so far it has been generated more by more expensive energy and food imports than by overheating the economy. The war in Ukraine and Western sanctions threaten energy flows on the continent. Gas prices will be five times higher next winter than in the US, and household energy spending is almost twice as high as a percentage of gross domestic product (GDP) – partly because Europe as a whole is poorer. Amid rising energy prices, consumer confidence has plummeted, and companies are also deeply affected.

However, the Eurozone economy will grow in 2022, but it will be fragile. And if Europe ceases all gas imports from Russia – or the Kremlin decides to cut off supplies – the danger of a recession will increase.

To Asia

Global growth is also threatened by a new pandemic wave in China. On April 6, China reported more than 20,000 new cases of Omicron disease. And because the authorities want to eliminate COVID-19, the 26 million residents of Shanghai and a few other metropolises are in lockdown.

If the relationship between lockdowns and GDP is maintained, China’s economy will be 7.1% lower than in an unrestricted situation, say analysts at US investment bank Goldman Sachs. Lockdowns also affect trade, which has not yet fully recovered from previous waves.

Chinese President Xi Jinping has called on his officials to minimize the impact of the restrictions. But if the economy reopens too soon, China will face a wave of illness and death, like the one that hit Hong Kong recently. If so, consumers will be frightened, which will become a source of economic imbalance in itself.

Until China manages to vaccinate as many young people as possible, lockdowns will become a habit of the Chinese economy, but also a source of global volatility.

The blame for the many problems facing the world economy now lies directly with the decision-makers. The Fed’s role is to tighten monetary policy when, in fact, it has only governed exuberance. In turn, European governments have allowed the continent to become dependent on Russian gas, and China’s Omicron problem was largely predictable and predictable. Therefore, all three major sources of problems for the global economy could be avoided, concludes The Economist.

Black clouds

The Americans have deposited money in the bank, the Europeans would have a lower economic growth than they had initially predicted.

THINK. The U.S. economy created nearly 500,000 new jobs in March. US households managed to raise deposits of about $ 2.5 trillion during the pandemic. FORECASTS. According to a Reuters poll, economic growth forecasts for Germany fell to 2.2% from 4% in the January poll. In France, the adjusted increase is 3.2% (compared to 3.7%).