- In Europe, expensive energy is sapping consumers of spending power and making factories costlier to run.
- Lockdowns will also disrupt global trade, which is still struggling with a hangover from earlier in the pandemic.
- Until China vaccinates its elderly in sufficient numbers using the most effective jabs, lockdowns will be an enduring feature of its economy and a source of global volatility.
Only a year ago, economists throughout the world were praising the quick recovery from the recession as reported by Economist.
Next downturn
Now they are worrying that the next downturn could be looming.
The Federal Reserve in the United States is planning to combat excessive inflation by raising interest rates and decreasing its balance sheet.
In Europe, expensive energy is sapping consumers of spending power and making factories costlier to run.
And in China, an outbreak of the Omicron variant of the coronavirus has led the authorities to impose the strictest lockdowns since the start of the pandemic.
The economy in the United States is overheating.
The annual rate of consumer price inflation is 7.9% and hourly wages are 5.6% higher than they were a year ago.
Yet wage growth has risen anyway, perhaps because workers are negotiating hard as rising prices erode living standards.
Tipping economy
The Fed needs both wage and price growth to cool if it is to hit its 2% inflation target.
It is expected to raise short-term interest rates, which started the year below 0.25%, to over 2.5% by December, and to continue to raise rates above 3% in 2023.
Hitting the monetary brakes, though necessary, endangers growth.
History suggests that the Fed finds it difficult to cool the jobs market without eventually tipping the economy into recession.
It has pulled off a “soft landing” only three times since 1945.
Given the record, a recession in the next two years looks likely.
Energy supply
Europe has an inflation problem, too, but it is so far caused by expensive imported energy and food more than by overheating.
Russia’s invasion of Ukraine and Western sanctions threaten the continent’s energy supply.
Gas prices for next winter are five times higher than in America, and spending on household energy is almost twice as high as a share of GDP (partly because Europe is poorer).
Firms are struggling, too: French industrial production fell in February.
The euro area’s economy will probably still grow in 2022 as a whole.
Because the government is committed to eliminating covid-19, Shanghai’s 26m residents, and those of other big cities with outbreaks, are under lockdown.
Most effective jabs
Xi Jinping, China’s president, has urged officials to cut the costs of its restrictions.
That would scare consumers and become a source of economic disruption in its own right.
Until China vaccinates its elderly in sufficient numbers using the most effective jabs, lockdowns will be an enduring feature of its economy and a source of global volatility.
The blame for the world economy’s many troubles lies squarely with policymakers.
The Fed’s job is supposed to be to take away the punchbowl just as the party gets going; it has instead presided over a blowout.
Did you subscribe to our newsletter?
It’s free! Click here to subscribe!
Source: Economist
