- America’s inflation is coming down because pandemic-related disruptions to supply chains are dissipating.
- China’s economy has the biggest potential to spring a pleasant surprise in 2023 because it has been so damaged by the zero-covid policy and a housing crash.
- Rising infections mean more lockdowns could be imminent.
There are still major issues with American inflation, the energy crisis in Europe, and China’s zero-covid policy as reported by The Economist.
Financial markets are experiencing a rare wave of confidence. A significant recession has been threatened by Europe’s energy crisis, which has persisted for most of the year, and China’s economy has been troubled by COVID-19 lockdowns and a property slump. Investors are now applauding progress on each of the three fronts. In America, yearly inflation decreased in October from 8.2% to 7.7%. Prices for natural gas in Europe have fallen by two-thirds since their August peak. China has eased several “zero-covid” policy limitations, and on November 11th, new financial relief measures were introduced to help struggling real estate developers. Since mid-October, this flood of news has increased global stocks by 13% as traders priced in fewer interest rate increases from central banks and caused the dollar to fall.
Decline in inflation
Unfortunately, investors are rushing things. Because supply chain disruptions brought on by the epidemic are fading, inflation in America is decreasing. A year ago, semiconductors and used automobiles were in limited supply, and hundreds of ships were anchored outside of Los Angeles waiting to be unloaded. Currently, there is an abundance of chips, the anchorage is empty, and car costs are decreasing. These advancements are probably going to continue. Additionally, beginning in March 2023, price comparisons with one year earlier will no longer use oil prices prior to Russia’s invasion of Ukraine. This will result in a further decline in headline inflation.
Rising interest rates
But if inflation declines, it will be more difficult to combat. Since there are still approximately two open positions for every unemployed person, the labour market is still incredibly tight in America, which is why wages are increasing at a rate above 5% annually. Only roughly a 3-4% wage increase is compatible with the Federal Reserve’s 2% inflation target (reflecting inflation, productivity growth, and possibly a recovery in the employees’ share of economic production). The Fed is therefore likely to maintain raising interest rates until the labour market is significantly cooled, notwithstanding the fact that job growth has slowed. Today, a small amount of disinflation would be possible, but a return to 2% will almost surely necessitate a recession.
The energy problem in Europe is currently experiencing a similar flimsy reprieve.
Due to large storage levels and pleasant weather, natural gas prices have fallen. Even still, Europe’s economy is undoubtedly contracting, and the energy shortage that will last at least two winters has only begun. Without any Russian gas pumped in, Europe might have to restock its reserves the next year. Both the temperature outside and the price of liquefied natural gas around the world could drop. Even worse, it appears that the inflation brought on by energy prices in the past is solidifying. In October, yearly inflation in Britain hit 11.1%; when food and energy were excluded, it was 6.5%. In Europe, wage growth is increasing and inflation expectations are gradually growing, making it more difficult to strike a balance between battling inflation and bolstering the economy.
As a result of the zero-covid policy and the property catastrophe, China’s economy has the greatest chance of pleasantly surprising us in 2023. The government has presented 16 steps to assist real estate enterprises in addition to 20 changes to the covid regulations. But there will be a long and difficult road ahead on both fronts. More lockdowns may be coming as a result of rising diseases. An orderly “exit wave” of infections in a population that has only recently been exposed to the virus could generate panic and further harm the economy. However, a controlled end to zero covid would help GDP. The property policies have aided developers and lessened the likelihood of a financial collapse, but home demand and the contribution of property to growth are likely to remain weak. The issues with the global economy are still serious. It won’t simply brush them off.
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Source: The Economist